Investors have reasons to get more bullish on U.S. Foods , according to Morgan Stanley. Analyst Brian Harbour upgraded the food distributor service's stock to overweight from equal weight and upped his price target by $8 to $54. His new target implies the stock could rally 29.7% in the next 12 months. Shares rose 1.6% before the bell. The stock has outperformed the market in 2023, up 22.4%. "We've been looking to become more constructive on USFD following management changes and the potential for new thinking/initiatives after management's agreement with an activist shareholder last year," Harbour said in a note to clients Tuesday. "Quantifying these opportunities is still a work in progress, in our view, and admittedly the stock has been given some credit already." "But there are some fundamental factors we think will continue to work in USFD's favor and drive the narrative," he added, "and we now underwrite more upside to our base case target." USFD .SPX YTD mountain US Foods vs. the S & P 500 Harbour said he sees more opportunity for the company following activist investor involvement that prompted a CEO change earlier this year and other management adjustments. He also said the narrative change should help the company beyond just the last few quarters. While the company has had solid product assortment and technology in the past, he said, it struggled with service, operational efficiency and execution, and its supply chain. Harbour said these areas have become a focus as the company looks to better its business, with some improvements already made. Compared with competitors, Harbour said, U.S. Foods is the "pure play" for U.S. broadline distribution. Additionally, the analyst said the company could be the most favorable customer exposure to have today if the U.S. macro economy holds up, as expected by the firm. Working with other businesses that aren't restaurants also makes the stock more attractive relative to peers. Meanwhile, he said, cash-and-carry opportunities provide optionality to the business. While it only makes up about 5% of sales by firm estimates, Harbour wrote that it's a higher-margin business that caters to a more price-sensitive consumer. This business could be resilient if the macro economy does soften, he said, and is an area for share gains and consolidation over time, particularly through the Smart Foodservice business. It's also a unique characteristic of U.S. Foods in its peer group, he noted. Better financials and consistency in that area could help support the stock's valuation, Harbour said. The company's improvement in both case growth and profit has shown business-driven performance as opposed to just post-pandemic recovery, he said. And more consistent performance compared with expectations can help close what's been seen as a valuation gap against peers. The company also has a cleaner balance sheet than it has had historically, he said. Elsewhere, Harbour downgraded Performance Food Group to equal weight from overweight and pulled his price target down to $66 from $74. Still, his price target implies the stock could rally about 17.2% in the next year. — CNBC's Michael Bloom contributed to this report.
