Activist Fund Makes the Case for US Foods Boosting Its Earnings

(Bloomberg) -- Activist fund Sachem Head Capital Management contends US Foods Holding Corp. is underd relative to its food-distribution peers and could better its performance through steps such as improving prices and courting high-margin customers.

The New York-based hedge fund run by Scott Ferguson said in a letter to its investors that US Foods could benefit from many of the steps taken by its rival Sysco Corp., which was targeted in 2015 by investor Trian Fund Management. Ferguson said in addition to structural industry growth, US Foods could significantly improve margins.

“With the help of an activist shareholder, Sysco meaningfully expanded profitability by improving discipline around pricing and increasing focus on high-margin private label goods and lucrative smaller restaurant customers,” Ferguson said in the letter dated Dec. 13 to Sachem Head investors obtained by Bloomberg.

“US Foods can implement many of the same initiatives while innovating in other areas, such as technology and central replenishment,” he said in the letter summing up the fund’s third-quarter activities and performance.

A representative for US Foods, based in Rosemont, Illinois, wasn’t immediately available for comment. Sachem Head declined to comment.

Sachem Head disclosed in November that it had acquired about 2 percent of US Foods as of Sept. 30. Ferguson said in the letter that the company could generate $3 in cash earnings per share in 2020, resulting in a 12-month price target of about $45 a share. US Foods has already identified initiatives that could improve margins by 20 to 30 basis points per year, Ferguson said.

Shares of US Foods, which were little changed this year through Friday, fell 2 percent to $31.18 at 3:09 p.m. Monday in New York trading.

‘Significant Upside’

“The combination of structural industry growth, margin opportunity, and a substantial valuation discount provides significant upside to the current share price,” Ferguson said.

Sachem Head reported in the letter that it had a net return of 1.6 percent on investments in the third quarter, bringing its year-to-date return as of Sept. 30 to 2.3 percent. Ferguson said Sachem Head Funds were down about 7.6 percent in October.

“We are disappointed with our performance for the month,” he said. “In general, the fundamentals of our positions remained sound. However, several of our investments exhibited extreme share price moves due to general market de-risking.”

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