Food Distributor Valuations – December 2021
After a lackluster 2020, valuations and financial performance for publicly-traded food distributors rose dramatically through December 2021. The industry was adversely impacted in 2020 by reduced consumer demand in the food-service, hospitality, and travel sectors. Much of the growth in 2021 coincided with lighter pandemic-related restrictions and strong consumer spending. This article will examine some of the factors that appeared to have impacted the valuations of publicly-traded food distributors.
Important notes: This article examines potential driving factors for publicly-traded food distributor valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, to keep the length manageable, this article will focus on what are typically perceived to be primary value drivers. It will not touch on every observation in the data. Check out What is Value? and Risk and Return in the Market Approach for a quick read on the basics of risk and return and how they apply to this article.
The industry constituents for this analysis are listed below. We focused on publicly-traded companies in the United States that distribute food. Companies had to be traded for at least a year on a major exchange and have a stock price of $1.00 or more. The effective date of this analysis is December 31, 2021.
Figure 1 summarizes three items for the food distributors:
- Market value of invested capital (“MVIC”) calculated as the sum of market capitalization and interest-bearing debt;
- Median revenues; and
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
The latest fiscal year is notated “LFY” (2020), while the latest 12 months is labeled “LTM” (latest available information as of December 31, 2021).
MVIC, revenue, and EBITDA for the industry constituents have generally increased over the last five fiscal years and the LTM period. Industry valuations grew significantly in the LTM period after a lackluster 2020 (LFY). All of the public food distributors experienced an increase in their MVICs in the LTM.
As was noted earlier, much of the improvement in 2021 occurred as COVID restrictions lifted and consumer spending continued to rise. However, as demand continues to increase, competitive challenges remain. Cost control measures are necessary to maintain profitability amid rising delivery and labor costs. Executives in the foodservice-focused industry subsegment identify investments in automation (among other factors) as one way to maintain competitive position in the industry. Significant future capital expenditures tend to impact valuations when such expenditures become known to the investor community.
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).
Revenue and EBITDA multiples increased over the last five fiscal years, and then declined in the LTM period. We will explore the various factors that appear to be impacting valuation multiples in the industry.
The Growth Story
Growth often has a strong influence on how companies are valued. Figures 4 and 5 below present a summary of the consensus forecasts for each group. Note that “NFY” means next fiscal year; NFY (blue line) = calendar 2021 for most companies, NFY (orange line) = calendar 2020 for most companies. “Current year” means December 31, 2021, while “prior year” means December 31, 2020.
In Figures 4 and 5, the orange line represents data as of December 31, 2020. At the time, the industry expected stable revenue and EBITDA growth. Actual results for 2020 (as seen in the blue line) outperformed these expectations. Based on current projections, 2021 performance is expected to substantially exceed prior year projections for this year.
We also looked to identify meaningful relationships between growth and observed revenue and EBITDA multiples. Companies with stronger projected revenue growth rates generally appeared to trade at higher valuation multiples. Figures 6 and 7 present this relationship.
In Figures 6 and 7, we observe that the lowest valuation multiples are associated with the lowest projected growth rates. We noted a few companies whose multiples appeared to deviate from this relationship, indicating that other factors may be impacting valuation multiples for these companies.
See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This dynamic can be due to several factors, including improved product or geographic diversification, deeper management teams, access to various distribution channels, and better availability of capital.
Figure 8 presents each company’s market capitalizations plotted against its respective LTM revenue multiple.
Based on Figure 8, size did not appear to have a measurable impact on valuation multiples.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. In this case, NFY revenue multiples appeared correlated with projected margins. Figure 9 presents this possible relationship.
The relationship between profitability and revenue multiples appears to stick for most companies in the group. However, we again noted inconsistencies. In particular, The Chef’s Warehouse is expected to generate an average level of profitability but traded at the highest LTM revenue multiple. This phenomenon may be due to the substantial revenue growth projected for this company.
The Leverage Story (***New***)
New to this update, we consider the impact of financial leverage (or the companies’ use of debt) and their impact on the valuation multiples. In the last year, we have noticed an increasing trend of risk mitigation among investors, both in the private and public markets. Therefore, we have included financial leverage among the considerations we analyze to explain the observed valuation multiples.
Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) are issued to equity holders. Figure 10 plots LTM revenue multiples against their associated debt to total capital ratios.
Figure 10 indicates that there may be some correlation between revenue multiples and financial leverage. Interestingly, revenue multiples appeared to be most aligned with leverage ratios than the other factors considered in this analysis.
Tying it All Together
The trends observed in this article suggest that investors are considering multiple factors when valuing companies in this industry. However, growth, profitability, and financial leverage appeared to have the most notable impact on valuation multiples.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
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