We recently published a list of The 10 best defensive stocks to buy now. In this article, we take a look at how Performance Food Group Company (NYSE: PFGC) compares to other defensive stocks.
Defensive stocks tend to remain stable and are less affected by economic downturns. These companies operate in sectors that provide essential goods and services that people need regardless of the economic climate. Defensive stocks primarily include stocks of companies in the utilities, consumer goods, and healthcare sectors because they provide basic necessities of life. Companies in these sectors tend to have lower volatility and often pay stable dividends. They usually offer a safer investment option during times of market uncertainty.
US stocks rise sharply, but experts remain cautious
US stocks are doing well, thanks to strong economic data that has reassured investors. The S&P 500 and Nasdaq 100 have posted significant gains as they gained 4.3% and over 6% respectively in the last 5 days ending August 15. Global markets have also recovered from recent losses, and the US market as a whole has recovered from the losses it suffered in the first week of August. Investor sentiment remains strong, and US stocks are seeing continuous inflows. Moreover, Fed officials are hinting at possible rate cuts, which supports optimism that the US economy is on track for a soft landing.
However, some experts remain concerned about the future of the U.S. economy and markets and take a more conservative view. According to a July report by JP Morgan, recent market trends have benefited large, high-quality companies, particularly in technology and AI, resulting in high market concentration. However, high valuations and investor positioning may make it difficult to maintain this momentum in the second half of 2024. The report says that while U.S. market volatility is currently low, it could rise if conditions change.
According to Bruce Kasman, global growth is stable at 2.4%, with Western Europe and emerging markets recovering better and the manufacturing sector picking up again. Despite this, global core inflation is expected to be around 3% in 2024, which could limit the potential for monetary easing. Kasman warned that controlling inflation and normalizing interest rates could weaken demand and, in interaction with political factors, cause further inflation and tightening of monetary policy by central banks.
Leon Cooperman’s view on the current conditions
On August 15, Omega Advisors Chairman and CEO Leon Cooperman shared his perspective on the current economic situation CNBC Money Transfer CompanyCooperman expressed a cautious outlook on the economy, driven by two main factors. First, he is alarmed by the rapid increase in the US national debt, which has doubled from about $17 trillion in 2017 to about $34-35 trillion today. He said that this level of debt growth, which outpaces economic growth, is unsustainable and could lead to a fiscal crisis. However, the exact timing of such a crisis is uncertain. He added that none of the political parties are addressing this looming problem.
Second, Cooperman compared today’s market conditions with past periods of financial excess, such as the Nifty 50 era in the 1970s, when companies with extremely high valuations eventually went bust. He noted that the 10-year bond yield was 6.5% then, significantly higher than the current rate of around 3.9%. He believes that market valuations are not too high if the current bond yield is reasonable. However, he suspects that interest rates are too low and expects a rise in long-term interest rates, particularly the 10-year Treasury yield.
While he expects the Federal Reserve to cut short-term interest rates, which could lower borrowing costs, he believes long-term interest rates will rise, causing bond prices to fall and potentially putting downward pressure on equity valuations. If long-term interest rates rise significantly, it could make the stock market less attractive and potentially lead to a market decline.
Even though the current year has shown healthy markets with some corrections, Leon Cooperman’s expectations for the markets cannot be ignored. Cooperman is considered one of the most successful investors of the last decades. If these expectations come true, investors could turn to more defensive market sectors.
Our methodology
For this article, we used stock screeners to identify over 50 large- and mega-cap stocks from defensive sectors such as consumer staples, utilities, and healthcare. We narrowed our list down to 10 stocks with positive analyst sentiment and the highest average analyst price target as of August 16.
A friendly team in the supermarket fills the shelves with products for the catering industry.
Performance Food Group Company (NYSE:PFGC)
Share price as of August 16: USD 72.88
Average analyst price target as of August 16: 20.7%
One of the best defensive stocks, Performance Food Group Company (NYSE:PFGC) is engaged in the marketing and distribution of food and related products through its subsidiaries. The company focuses on offering a diverse range of food and related products to different customer groups. It operates through three main segments: Foodservice, Vistar and Convenience.
The company offers over 300,000 items, including candy, snacks, disposables, beverages, dairy, meat, frozen foods and fresh produce, and serves more than 300,000 locations, including independent and chain restaurants, educational institutions, healthcare facilities and grocery stores.
Performance Food (NYSE:PFGC) has been covered by 15 analysts and has a consensus rating of Buy. As of August 16, the average price target of $88 has an upside potential of 20.7% from current levels. In addition, on August 15, BMO Capital analyst Kelly Bania raised the price target on the stock from $80 to $87 and maintained an Outperform rating. The analyst highlighted that the company’s fourth-quarter results were robust, resulting in a 10.5% increase in EBITDA for FY24. According to the analyst, management has forecast a similar 10% EBITDA growth for FY25, despite ongoing challenges in the restaurants and convenience store segments. The positive stock performance following earnings reporting was likely boosted by news of a major Cheney Bros merger and acquisition in the foodservice space, given the company’s strong integration and synergy realization history, the analyst added.
Performance Food (NYSE:PFGC) has shown promising growth and solid financial health, as highlighted by its recent financial report for the last quarter of 2024. Revenue increased 2.2% year over year from $14.87 billion to $15.19 billion. This growth is supported by a strong food service segment that stands out as the largest in its space with annual revenue of $29 billion and a segment margin of about 3.5%.
Adding to this positive momentum, the company recently announced a significant acquisition. Performance Food (NYSE:PFGC) plans to acquire Cheney Bros, Inc., a major Florida-based food distributor, for $2.1 billion. Cheney Bros has annual sales of $3.2 billion and will increase the company’s presence in key southeastern states where it has been underrepresented. This acquisition is expected to expand the company’s customer base and increase its market reach.
The deal is valued at 9.9 times EBITDA and includes expected cost savings of $50 million expected to occur in the third year after the acquisition, indicating strong potential for improved financial performance and efficiency gains post-acquisition. The transaction is expected to close in calendar year 2025 and will bring additional assets, including state-of-the-art facilities and a fleet of approximately 1,800 tractors and trailers that collectively travel approximately 23 million miles annually.
With this acquisition, Performance Food (NYSE:PFGC) not only expands its infrastructure, but also gains access to new markets and customers in Florida, Georgia, North Carolina and South Carolina. The combination of solid revenue growth, strategic expansion and operational improvements positions the company well for continued success in the competitive food distribution sector.
ClearBridge Investments stated the following about Performance Food Group Company (NYSE:PFGC) in its fourth quarter 2023 investor letter:
“Our holdings in the consumer goods sector also contributed to performance. Restaurant food distributor Performance Food Group Company (NYSE:PFGC) continues to benefit from higher consumer spending on dining. Likewise, Coty, the global beauty company comprised of a market-leading luxury fragrance business and a mass cosmetics business, reported strong quarterly results with outperformance across all geographies and business segments. Given the continued strength of the luxury fragrance market globally, we believe the company’s fundamentals have improved much more than the stock’s valuation.”
Total PFGC takes 10th place on our list of the best defensive stocks to buy. While we recognize PFGC’s potential as an investment, we believe AI stocks promise higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than PFGC but trades at less than 5 times its earnings, read our report on the cheapest AI stock.
Read next: $30 trillion opportunity: The 15 best humanoid robot stocks to buy, according to Morgan Stanley, and Jim Cramer says NVIDIA has ‘become a wasteland.’
Disclosure: None. This article was originally published on Insider Monkey.
