Although the S&P 500 is down 1.8% over the past six months, Performance Food Group’s stock price has fallen further to $87.74, losing shareholders 12.6% of their capital. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Performance Food Group, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Performance Food Group Will Underperform?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons there are better opportunities than PFGC and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Consumer Discretionary - Distributors company because there’s a ceiling to what customers will pay.
Over the last two years, Performance Food Group’s units sold averaged 6% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Performance Food Group has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.1%, below what we’d expect for a consumer discretionary business.
3. New Investments Bear Fruit as ROIC Jumps
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Performance Food Group’s ROIC increased by 3 percentage points annually each year over the last few years. This is a good sign, and we hope the company can continue improving.
Final Judgment
Performance Food Group falls short of our quality standards. After the recent drawdown, the stock trades at 16.4× forward P/E (or $87.74 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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