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Shares of Sysco (SYY) fell over 4% in the past trading week. The foodservice distributor reported its first quarter results for its fiscal 2013 on Monday.

First Quarter Results

Sysco reported first quarter revenues of $11.09 billion, up 4.7% on the year. Sales were driven by food cost inflation which helped sales increase by 2.2%, acquisitions which boosted sales by 0.5%. The important case volumes grew by 2.6% over the past quarter. Revenues came slightly short of analysts expectations of $11.14 billion.

Operating income came in at $479 million, down 6.0% on the year. Operating earnings were under pressure as the result of business transformation expenses totaling $41 million, and a $30 million increase in payroll expenses. Consequently, gross margins fell from 18.4% to 18.1%.

Net income fell 5.3% to $287 million. Diluted earnings per share fell by two pennies to $0.49. Adjusted earnings, which exclude transformation expenses, among others, came in at $0.58 per share. Analysts expected the company to net earn $0.50 per share.

CEO Bill DeLaney commented on the results, "Solid sales growth and effective overall operating expense management contributed to increased adjusted EPS in our underlying business for the quarter. Volume gains drove our top line growth as food cost inflation moderated from the historically high levels experienced in recent quarters."

Valuation

Sysco ended its third quarter with $548.4 million in cash and equivalents. The company operates with $3.02 billion in short and long term debt, for a net debt position of roughly $2.5 billion.

For the full year of its fiscal 2012, Sysco generated $42.4 billion in total revenues. The company net earned $1.12 billion, or $1.90 per diluted share.

The market currently values Sysco around $17.6 billion. This values the foodservice company at 0.4 times annual revenues and 15-16 times annual earnings.

Sysco currently pays a quarterly dividend of $0.27 per share, for an annual dividend yield of 3.6%.

Investment Thesis

Year to date, shares of Sysco are trading roughly unchanged. Shares traded in a tight trading range of $27-$31 so far this year, with shares exchanging hands at $30 at the moment.

Long term shareholders have not seen great returns either. Over the past decade, shares are trading unchanged in a wide range of $20 to $40 per share. Between 2009 and 2012, Sysco grew its revenues from $36.9 billion to $42.4 billion. Net income rose modestly from $1.06 billion to $1.12 billion over the same time period.

Sysco has a policy to increase annual revenues by approximately 1% per year through acquisitions. Earlier in October, Sysco announced the acquisition of Distagro in Canada and Keelings in Ireland. Combined, both companies will add roughly $400 million in annual revenues, boosting Sysco's future revenues by 2.3%. While the acquisitions are rather modest in size, they are "ambitious" for Sysco.

Sysco which focuses on the restaurant industry is suffering from a range headwinds. Slower restaurant industry growth, food cost inflation and increased operating expenses, have harmed earnings growth in recent periods. On the bright side for investors, the company has been taking restructuring charges to streamline operations. Food cost inflation, fell from 3.3% in the fourth quarter of its fiscal 2012, to 2.2% in the first quarter of fiscal 2013.

Despite the company's restructuring efforts which should boost earnings growth, the valuation of 15-16 times earnings gives few reasons to expect spectacular share price gains. Long term holders, looking for yield could hold on to their position, receiving 3.6% in the meantime.

Source: Sysco - Company Remains On Track With Its Restructuring Efforts