I BD's Wholesale-Foods group has been a healthy performer of
late, rising to an 8 ranking on Friday, up from a 114 ranking
eight weeks ago. The performance shows the group rising 7.8% in
that period -- outpacing nearly all of the 197 industry groups
tracked by IBD.
The stocks driving the bulk of the group's gains
includePerformance Food Group (
), and thinly traded issues such asCore-Mark Holdings (
) andFarmer Brothers (
But none of the stocks in the group is exactly setting the
world on fire, and earnings reports over the past week
underscored the industry's challenges.
The biggest stock in the group by market cap,Sysco (
), hasn't produced a double-digit sales or earnings gain in
years. Among other things, Sysco has been hurt by "intense
competitive pressures, volatile commodity costs and soft consumer
spending," Morningstar analyst Erin Lash said.
The group's second-biggest player, and arguably its most
flashy stock --Keurig Green Mountain (
) -- has seen its earnings slip three quarters in a row. Revenue
has been flat or declined in two of the past three quarters. It
owns the Keurig K-cup franchise, andCoca-Cola (KO) holds a 16%
stake in the company.
Keurig has been plagued by a difficult transition to its
Keurig 2.0 brewing system, and the Kold beverage machine, which
is key to its relationship with Coke, has generated disappointing
Even the best financial performer in the group, Performance
Food, has averaged only 9% annual revenue growth over the last
On Wednesday, the Richmond, Va., distributor reported a 64%
earnings gain for the third quarter, well above forecasts, but
revenue growth of 6% stopped short of analyst expectations.
Shares briefly spiked to a new high, then dropped sharply.
Despite a loss for the week, the stock on Friday traded 9% above
its Oct. 1 IPO price.
What ties stocks in the Wholesale-Foods group together? Not
much, beyond the fact they all, to some degree or another,
distribute food or related products to retailers.
So why have shares of wholesale food stocks been moving
higher? Part of the explanation is valuation, analysts say.
Some stocks in the group, such as former high flyers Keurig
Green Mountain andUnited Natural Foods (UNFI), have been in
months-long downtrends, making them cheap buys compared with
peers. Green Mountain shares sank 30% on Aug. 6 alone after it
gave weak guidance and got hit by several downgrades.
Susquehanna analyst Pablo Zuanic said in an Aug. 6 note that
the initial price drop "may be overdone." But he also said it
reflected a "crisis of confidence in management being able to
right this ship" and hinted at "the risk of future market share
and profit margin erosion, given the continued strategic missteps
by the company."
Despite the decline, Keurig earns a respectable B
Accumulation/Distribution grade from IBD. This shows
institutional investors have been moving into the stock during
its rebound from an August low.
Core-Mark Holdings and Farmer Bros. are both climbing out of
consolidations begun early this year. Core-Mark's earnings are
rebounding sharply, partly due to cheap gas prices driving more
consumers to the convenience stores and gas stations to which it
distributes its products. Analyst consensus calls for a 46%
earnings gain this year. Shares are up 28% this year.
Farmer Brothers' earnings are expected to accelerate, from a
31% gain last year to an estimated 69% increase for 2015. But
shares of the distributor of coffee and spices tumbled on Friday
after it reported late Thursday that its fiscal-first-quarter
earnings rose 56%, in line with expectations, but revenue slipped
2%. Analysts had expected a 3% revenue gain.
The results showed ongoing success in Farmer's cost-cutting
efforts, which include relocating its coffee roasting operations
from Torrance, Calif., to Northlake, Texas. But demand remains
spotty in its client industries, including restaurants, hotels
and fast-food outlets.
The stock consolidated across most of this year, then rocketed
50% to a Nov. 4 high following a big fiscal-fourth-quarter
earnings beat announced Sept. 9.
Shares traded down 10% on Friday, stopping short of a test of
support at the stock's 50-day moving average.
The Prospects Of Buyouts
The Wholesale-Food group might also be benefiting from a
couple of macro trends -- lower fuel prices and an improving
Cheaper prices at the pump are good for any industry that must
transport goods over long distances. And an improving economy and
job market tend to prop up the restaurant industry -- a key end
market for many food wholesalers.
Meanwhile, the prospect of consolidation in the group is
providing an additional, speculative lift.
Although Sysco fell short in its $8.2 billion buyout bid of US
Foods over the summer, the company "still has opportunities to do
acquisitions, given both its cash flow generation and its
capacity," Lash said.
Others in the group might be on the other side of the buyout
equation. RBC Capital Markets analyst William Kirk noted in a
Sept. 15 report that United Natural Foods "could be a takeout
target, should competitors prefer purchasing distribution
infrastructure rather than building it."
There's also speculation that Coke will eventually gobble up
the rest of Keurig.
Competitive And Fragmented
All nine stocks in the Wholesale-Food group technically deal
in wholesale food distribution. After that, the similarities
pretty much end.
Sysco and Performance Food are the only stocks that fit the
traditional definition of wholesale food distributors. They have
their own distribution networks and sell a variety of foods to
restaurants, retailers and institutional clients, such as schools
and health care facilities. Major products include frozen,
processed and prepared foods; dairy items; poultry, fish and
meat; fresh produce; and baked goods.
The rest of the group is a melange of different
Keurig Green Mountain distributes single-serve K-Cups and
other coffee and tea products, primarily to supermarkets and
other food retailers. United Natural Foods sells organic/natural
products to groceries, health-food stores and other
Core-Mark's focus is on snacks, fast foods and groceries
distributed to convenience stores. Farmer distributes coffee and
spices to restaurants, hotels, hospitals and fast-food outlets.G
Willi Food International (WILC) distributes kosher products,
canned vegetables and fruits to supermarkets and others food
The other two stocks in the group areAmcon Distributing (DIT),
which sells food, tobacco products and other consumer goods,
andCoffee Holding (JVA), which deals in coffee.
Industry tracker First Research pegs the U.S. wholesale food
market at around $800 billion. It's a scattered industry,
comprised of an estimated 34,000 establishments. These range from
small local operations to divisions of large corporations.
In addition to Sysco, major players include privately held
firms US Foods, C&S Wholesale Grocers, McLane and Supervalu.
The 50 largest companies generate about half of industry revenue,
First Research says.
Although lower fuel prices are helping to ease costs at many
distributors, that has been partially offset by a truck driver
shortage, Lash says.
This shortage "is driving transportation and logistics costs
higher for Sysco and others," she said. "It's an industry hazard
that reflects a few different factors. One is sheer demographics
due to an aging group of workers. There's also increased
regulatory oversight in terms of driving times, putting
additional upward pressure on costs. This is unlikely to abate
over the near term."
One thing industry watchers will keep an eye on in coming
months is how food prices trend.
"We have seen double-digit food inflation in protein, dairy
and seafood, although dairy costs have been less of a factor more
recently," Lash said.
When food inflation is modest -- say 3% or so -- it's easy
enough for distributors to pass the higher costs along to
customers through slightly higher prices, Lash says.
But when inflation goes into double digits, it's not as easy.
The reason: Wholesale food customers such as local and regional
restaurants and grocers have a hard time raising their prices
enough to offset the higher expenses "without a negative impact
on traffic trends," Lash said.