Critical Comparison: US Foods Holding Corp. (USFD) vs. Alcon, Inc. (ALC)

US Foods Holding Corp. (NYSE:USFD) shares are up more than 28.48% this year and recently decreased -0.20% or -$0.08 to settle at $40.65. Alcon, Inc. (NYSE:ALC), on the other hand, is up 3.70% year to date as of 09/10/2019. It currently trades at $60.19 and has returned -0.61% during the past week.

US Foods Holding Corp. (NYSE:USFD) and Alcon, Inc. (NYSE:ALC) are the two most active stocks in the Food Wholesale industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect USFD to grow earnings at a 9.55% annual rate over the next 5 years. Comparatively, ALC is expected to grow at a 6.19% annual rate. All else equal, USFD’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. US Foods Holding Corp. (USFD) has an EBITDA margin of 4.23%. This suggests that USFD underlying business is more profitable

Cash Flow

Cash is king when it comes to investing. USFD’s free cash flow (“FCF”) per share for the trailing twelve months was +0.87. Comparatively, ALC’s free cash flow per share was +0.20.

Valuation

USFD trades at a forward P/E of 16.41, a P/B of 2.58, and a P/S of 0.36, compared to a forward P/E of 28.80, a P/B of 1.51, and a P/S of 4.04 for ALC. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. USFD is currently priced at a -8.14% to its one-year price target of 44.25. Comparatively, ALC is -7.09% relative to its price target of 64.78. This suggests that USFD is the better investment over the next year.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. USFD has a short ratio of 1.76 compared to a short interest of 1.54 for ALC. This implies that the market is currently less bearish on the outlook for ALC.

Summary

US Foods Holding Corp. (NYSE:USFD) beats Alcon, Inc. (NYSE:ALC) on a total of 9 of the 13 factors compared between the two stocks. USFD is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and higher liquidity. In terms of valuation, USFD is the cheaper of the two stocks on an earnings and sales basis, USFD is more undervalued relative to its price target.