Tuesday, September 19, 2006

Calls of Note Part 6

- Goldman Sachs has added Performance Food Group (NASDAQ:PFGC) to the Americas Conviction Buy List, expecting a 25% return potential over the next year. Management's
top/bottom line initiatives combined with a significantly enhanced infrastructure better equips the company than ever before to capitalize on its huge EBIT margin expansion opportunity. As 2H operating momentum accelerates and new CEO Steve Spinner's visibility increases, sentiment and valuation should continue to improve. In addition, although the shares have bounced back somewhat since their low in late August, they are still massively underperforming peer Sysco and customers by 25%. If the shares merely recapture half of this gap, a 12% plus return would be realized. Firm's 12-month price target is $33.96.

Firm believes five potential near-term catalysts could spur share price improvement. 1) 2H operating momentum should strengthen as healthy Street sales growth leverages expenses and last year's labor investments and "Hurricane Katrina" are cycled. At the Goldman Sachs Global Retail Conference in early September, PFGC management noted that top-line trends had already begun to improve. 2) The increased visibility of new CEO Steve Spinner should inspire greater investor confidence in the turnaround. 3) The unveiling of a share repurchase authorization. 4) New Customized business. Management has indicated that proactive discussions with new accounts continue to occur. Something could be announced before year-end. (5) A Broadline acquisition. While the timing and magnitude is always hard to predict, management consistently notes that its balance sheet is under-levered and that it intends to eventually resume acquisition activity.

Notablecalls: Expect to see some interest in PFGC shares today.

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