We recently compiled a list of the 10 Best Defensive Stocks To Buy Now. In this article, we are going to take a look at where Performance Food Group Company (NYSE:PFGC) stands against the other defensive stocks.
Defensive stocks tend to remain stable and less affected by economic downturns. These companies operate in sectors that provide essential goods and services, which people need regardless of the economic climate. Defensive stocks mostly include stocks of companies among utilities, consumer staples, and healthcare sectors as they provide basic necessities of life. Companies in these sectors often show less volatility, and often provide steady dividends. They usually offer a safer investment choice during periods of market uncertainty.
US Stocks Surge But Experts Remain Cautious
U.S. stocks are having a great time, which is owed to strong economic data that has reassured investors. The S&P 500 and Nasdaq 100 have seen significant gains, as they are up 4.3% and over 6% over the last 5 days on August 15, respectively. The global markets have also recovered from recent losses, and the US broader market is back from the losses it faced in the first week of August. The investor sentiment remains strong and U.S. equities are seeing continuous inflows. Additionally, Fed officials are hinting at potential rate cuts which support optimism that the U.S. economy is on track for a soft landing.
However, some experts are still concerned about the future of the US economy and markets and hold a more conservative view. According to a July report by J.P Morgan, recent market trends have benefited large, high-quality companies, especially in tech and AI, which have resulted in high market concentration. However, maintaining this momentum in the second half of 2024 could be difficult due to high valuations and investor positioning. 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 steady at 2.4%, with improved recoveries in Western Europe and emerging markets, along with a rebound in the manufacturing sector. Despite this, core global inflation is projected to remain around 3% in 2024, which could limit the potential for policy easing. Kasman warned that achieving inflation control and rate normalization might weaken demand and could interact with political factors to cause further inflation and central bank tightening.
Leon Cooperman’s Perspective on the Current Conditions
On August 15, Omega Advisors chairman and CEO, Leon Cooperman shared his perspective on the current economic outlook with CNBC Money Movers. Cooperman expressed a cautious outlook on the economy, which is driven by two main factors. First, he is alarmed by the rapid increase in the U.S. national debt, which has doubled from about $17 trillion in 2017 to approximately $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 further added that neither political party is addressing this looming issue.
Secondly, Cooperman compared today’s market conditions to past periods of financial excess, such as the Nifty 50 era in the 1970s, when companies with extremely high valuations eventually went bankrupt. He noted that during those times, the 10-year bond yield was 6.5%, much higher than the current rate of around 3.9%. He believes that if the current bond rate is appropriate, market valuations aren’t too high. However, he suspects that interest rates are too low and anticipates a rise in long-term rates, particularly the 10-year Treasury yield.
While he expects the Federal Reserve to cut short-term rates, which could ease borrowing costs, he believes long-term rates will increase, leading to a decline in bond prices and potentially putting downward pressure on stock valuations. If long-term rates rise significantly, it could make the stock market less attractive and could possibly result in a market decline.
Even though the current year has shown healthy markets with a couple of corrections, Leon Cooperman’s expectations from the markets cannot be ignored. Cooperman has a track record of being one of the most successful investors of the past several decades. If they hold out to be true, investors might look toward more defensive sectors of the market.
Our Methodology
For this article, we used stock screeners to identify over 50 large to mega-cap stocks from defensive sectors such as consumer staples, utilities, and healthcare. We narrowed our list to 10 stocks with positive analyst sentiment and the highest average analyst price target upside as of August 16.
A friendly grocery store team stocking shelves with foodservice products.
Performance Food Group Company (NYSE:PFGC)
Stock Price as of August 16: $72.88
Average Analyst Price Target Upside as of August 16: 20.7%
One of the best defensive stocks, Performance Food Group Company (NYSE:PFGC), through its subsidiaries, engages in the marketing and distribution of food and related products. The company focuses on providing a diverse range of food items and associated 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, meats, frozen food, and fresh produce and it caters to more than 300,000 locations. These include independent and chain restaurants, educational institutions, healthcare facilities, and convenience stores.
Performance Food (NYSE:PFGC) has been covered by 15 analysts and has a consensus Buy rating. As of August 16, the average price target of $88 has an upside of 20.7% from the present levels. Additionally, on August 15, BMO Capital analyst Kelly Bania raised the price target on the stock to $87 from $80 and kept an Outperform rating. The analyst highlighted that the company’s Q4 results were robust, leading to a 10.5% increase in EBITDA for FY24. Management has projected a similar 10% EBITDA growth for FY25, despite ongoing challenges in the restaurant and convenience store sectors, according to the analyst. The favorable stock performance following the earnings report was likely enhanced by the news of a major foodservice merger and acquisition of Cheney Bros, given the company’s strong history with integration and realizing synergies, the analyst added.
Performance Food (NYSE:PFGC) has shown promising growth and solid financial health, highlighted by its latest fiscal report for the final quarter of 2024. Revenue increased by 2.2% year-over-year, rising from $14.87 billion to $15.19 billion. This growth is supported by a strong food service segment, which stands out as the largest in its field with annual sales 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 food service distributor based in Florida, for $2.1 billion. Cheney Bros, generating $3.2 billion in annual revenue, will improve 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 extend its market reach.
The deal is valued at a multiple of 9.9 times EBITDA and includes anticipated cost savings of $50 million, which are expected to materialize in the third year following the acquisition. It is an indication of a strong potential for improved financial performance and efficiency gains post-acquisition. The transaction is set to close in the calendar year 2025 and will bring additional assets, including state-of-the-art facilities and a fleet of around 1,800 tractors and trailers, which collectively cover approximately 23 million miles annually.
With this acquisition, Performance Food (NYSE:PFGC) will not only add to its infrastructure but also gain access to new markets and clients 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 regarding Performance Food Group Company (NYSE:PFGC) in its fourth quarter 2023 investor letter:
“Our holdings in the consumer staples sector also helped drive performance. Restaurant foodstuff distributor Performance Food Group Company (NYSE:PFGC) continues to benefit from greater consumer spending on dining. Likewise, Coty, the global beauty company comprised of a market-leading prestige fragrance business and mass cosmetic business, reported strong quarterly earnings with outperformance across all geographic regions and operating segments. With the continued strength of the prestige fragrance market globally, we believe the company’s fundamentals have improved much more than the stock’s valuation.”
Overall PFGC ranks 10th on our list of the best defensive stocks to buy. While we acknowledge the potential of PFGC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PFGC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
