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US Foods Holding Corp.(USFD) A Fair Valuation Of The Company Not Based On Accounting Tricks

|Includes: Sysco Corporation (SYY), USFD

Summary

USFD is using accounting tricks to increase earnings.

USFD past accounting irregularities may be continuing today.

USFD valuations are outrageous for a 28 year old non growing non dividend paying company.

USFD fair valuation 77% below current levels.

Valuation should be calculated based on Sysco Foods (SYY) failed takeover.

US Foods, more accounting tricks to inflate valuations to unreasonable levels.

Net Income for 2015 & 2016 is inflated by non operating revenue.

US Foods is an overvalued non growing 28 year old enterprise with a valuation compared to Sysco Foods (NYSE:SYY) who is growing, profitable and dividend paying.

Private equity is unloading shares by the millions every chance they get.

Read on to see what a fair valuation of this non-growing company should be.

Its no secret of US Foods dirty fraudulent past, just Google it and read the company's most checkered past of Accounting Fraud, Criminal probes, earnings restatements, Insider Trading, guilty pleas and convictions, government lawsuits and settlements, class action lawsuits etc. It's a wonder this company survived.

This company in the past has a history of using bad and fraudulent accounting to increase valuation. Now it seems they are up to more dirty tricks and non-recurring items to increase net income on their filings.

Examining the latest filing from the company's January's secondary from selling stockholders (Private Equity); some inconsistencies and events have caught my eye.

1. From 2011-2014 this over 28-year-old company had negative net income each year totaling over $283 Million. Then in 2015 it reports $168 Million in net income.

Looking into this 2015 net income you will discover that $288 Million of it was a Sysco food payment to them for a Acquisition termination fee. So without this $288 Million payment there would be more negative net income in 2015 of another $120 Million. Conveniently this payment came right before the company's IPO so they could show positive EPS misrepresenting this enterprise as a money making business. At the time of the IPO US Foods (NYSE:USFD) had not had operational net income for many years if ever.

2. The company's October 1, 2016 39 week ended net income is reported as $133 Million. If you look closely this $78 million or 59% is a Income tax (benefit) provision. In my opinion this is misleading investors.

3. In January 2016 just 4 months prior to the company's IPO, they paid out a $666.3 Million one-time special dividend to private equity stockholders increasing company debt and draining company cash. No dividends are currently being paid to shareholders.

4. On January 12, 2017 company CFO resigned to pursue other opportunities.

Current Valuation of this non-growing 28-year-old food distributor is at nosebleed levels.

Wall street analysts are all in! Do they really understand or care about the company's past history and offering an honest unbiased opinion on valuations? Did they delve into where this "Net Income" is coming from? I don't think so.

I am going to offer my own valuation. How do you value this company?

To properly value US Foods, you have to look at the failed Sysco Foods takeover attempt that should be the top valuation that anyone would ever pay for such a company. My point is that this would have been a very valuable company only if combined with the better run Sysco Foods , the largest food distribution company in the world.

In 2013 Sysco Foods bid to acquire US Foods for $8.2 Billion in cash, stock and assumed debt. ($3 Billion in common stock, $500 million in cash and $4.7 Billion in assumed debt) The government ended up blocking this most generous valuation claiming it would give Sysco Foods a too high market share and monopoly.

Using numbers base on articles valuing the deal, Sysco Foods was estimating a minimum (possibly more) benefit to them of $1.267 Billion of EBITDA after savings from synergies combining the 2 companies. So the calculation of Enterprise Value to EBITDA is as follows:

SYSCO FOODS attempted takeover valuation of US Foods

$8.2 Billion purchase price/$1.267 Billion EBITDA =

6.47 times EBITDA (with synergy savings)

US Foods Current Market Valuation:

$5.9 Billion Market Cap

$3.8 Billion Debt

$150 Million Cash (a low amount for a company with $23 billion in sales)

NET $9.55 Billion Total Enterprise Value

Estimated EBITDA 2016 (taken from secondary Prospectus January 2017)

EBITDA $776 Million

EV/EBITDA 12.3 times EBITDA (Current market valuation)

So, my fair valuation of US Foods equal to the Sysco Foods attempted takeover:

$776 Million estimated EBITDA times 6.47 = $5,020 Billion total Enterprise Value

Outstanding Shares 220,812,455

VALUATION based on companys' EBITDA:

EBITDA Valuation

$5.020 Billion EV

-$3.65 Billion NET DEBT

Market CAP $1.370 Billion

Price per Share $6.20 based on Sysco Foods Valuation

Current price per share is $27.15

Company is overvalued by 77%

Conclusion

US Foods is a very overvalued company. Private equity, the company and Sell side analysts are not giving a fair assessment of the value of the debt laden, non-growing, non-dividend paying 28 year old company with suspect earnings. Once these facts above are uncovered, US Foods stock price will come in by a substantial margin.

2017 Price target $15/share or lower

2018 Price target under $10/share

Disclosure: I am/we are short USFD.