Take a Helping of Sysco

On December 30th I initiated a stock position within my non-registered portfolio in Sysco Corp. (SYY) at $22.51.

Who's Sysco?
Sysco Corporation is a North American distributor of food and related products primarily to the food service or food-prepared-away-from-home industry. It provides products and related services to over 400,000 customers, including restaurants, health care and educational facilities, lodging establishments and other food service customers. Sysco is the far and away global leader in this area with sales of $38 billion. If you live on this continent you've likely seen Sysco's trucks driving around as they have the largest private truck fleet in North America (9,000 trucks).

Why Invest In Sysco?

Industry Factors

Sysco is the 800 lb. gorilla of the food distribution industry. Due to their long successful operating and relationship history, extensive infrastructure networks, and broad reach, Sysco possesses barriers to entry and an economic moat that is similar to that of Canadian Pacific Railway (CP) or UPS (UPS). As North Americans age and enter retirement, dining out at a nice restaurant with their families is a habit that is unlikely to be sacrificed for any meaningful period of time. Although the restaurant sector is being hurt by these tough economic times, people will again visit restaurants in droves going forward, an arena where Sysco derives about 60% of their revenues. By owning Sysco, the supplier, there is no need to speculate on which restaurant chain will succeed.

Consistency - Earnings & Dividend Growth

As readers know, I am a sucker for a really consistent (boring) company, and Sysco certainly fits the bill. Sysco has posted extremely consistent sales and earnings growth since 1970. For example over the past 10 years Sysco has had their earnings per share decline year over year just one time. They've also increased their dividend for 38 consecutive years including a very recent 9% raise in November, 2008. The company also generates a very strong return on equity well over 25% most years. Sysco's financial position is solid sporting a debt/equity ratio of about 0.5.

Why Now?

Similar to many other stocks in today's market, Sysco is currently trading in uncharted territory valuation-wise. It is dirt cheap compared with where it has traded in the past relative to it's current earnings, sales, and dividend rate. Sysco currently changes hands at a P/E of about 12x. That multiple is nothing short of unprecedented when you consider Sysco's history of trading at an average P/E between 17 and 28x earnings. Same story when you consider their low price to sales and price to book ratio. Sysco yields about 4.3% as of this writing, which is also very high and even unheard of relative to its history. They just raised the dividend 9% (after Lehman Brothers failed), and their pay-out ratio of earnings is only 45%.

..The next few years could be painful for Sysco if people choose to eat at home in a big way. In some cases though, eating away from home is unavoidable, and if one lives in a retirement home, or is in hospital or visiting countless other establishments that serve food but aren't restaurants, they'll have no choice but to use Sysco's services despite the economy. Regardless, people will be back at their favourite restaurants in the future celebrating a graduation, retirement, or simply too lazy to cook.

Comments

[k45:]

With grocery store prices as high as they are, it seems that eating out is reasonably priced.

Jan 01 09:18 AM

[GregT:]

Good call on Sysco. They are clearly the 800 pound gorilla and will be able to take more market share from competitors during the slowdown. Even though earnings growth may slow a bit, investors should keep in mind that gaining market share from competitors is easier during the tough times. Think the hills in the Tour de France - painful for everyone, but it allows the truly strong to increase their lead.

Jan 01 10:36 AM

[Ogradius:]

For some other stocks that I follow (JNJ and ARP are just two examples), I track recent acquisitions. In a market like this, a solid moat company can make some meaningful acquisitions at very low prices. It is also a sign of management's confidence.

I will have to check on Sysco's recent acquisitions, if any.

Jan 01 11:07 AM

[jepittman:]

This is a good call. Sysco earns around a 30% return on equity capital and is a very consistent performer.

On a recent trip to Key West, Fl. I saw a Sysco truck on Duval St. and stopped to chat with the driver who was making a restaurant delivery. He was very friendly and couldn't say enough good things about his company. He told me his volumns year on year had never decreased and that business was good. I know this is anecdotal but looking at the sale numbers companywide it likely isn't far off the mark.

Unemplyment is rising and a lot of customers are trading down the menu but the recent headwind of high diesel and gasoline prices have reversed. Diesel fuel for their large truck fleet is almost cut in half from the peak (the Key West truck makes its daily run from Miami). Also lower gasoline prices leaves extra money in consumers' budget for an extra meal out once in while.

The author has touched on Sysco's valuation. It is absurdly cheap. A dividend over 4% that will be raised in the future, makes it easy to wait for the recovery. This is an easy to understand business model with no shenanigans and an honest, shareholder friendly management. Employees own a lot of the stock and thrive is the sales oriented culture.

I have been a shareholder in Sysco for many, many years and have watched this stock's valuation get cheaper while sales, earnings, free cash flow, and dividends climb every year. Investors are being offered shares in a very clean, dominant, well run company at what IMO is a ridiculously low price. It will not stay this cheap for long.

Jan 01 08:35 PM

[2009trader:]

I doubt that Sysco can do well in this environment. Unemployment is high,- and rising, and people have lost money in their investments and the value of their homes. The savings rate is the highest it has ever been according to government statistics. The discretionary spending is going to disappear- first to go will be eating out.

Also the large restaurant chains have already cut their prices to attract the few customers that are still going out and they will put the pressure on Sysco to reduce their costs, and margins; plus the small operators will load up at Costco or other wholesalers. Sysco will also suffer credit losses as some of their customers go bankrupt. Sysco also came out with guidance on Dec 23 saying that revenue will not increase in 2009, which is a change from what they guided only months earlier.

I will not buy Sysco now. In fact they are a good short candidate now that the dividend has just been paid. I will look at them again in Q3, as we should start to see some rebound in 2010.

Jan 02 06:32 PM

[jepittman:]

There is no doubt SYY faces the headwinds of rising unemployment and a customer 'trading down ' the menu. However many unemployed people still eat meals away from home. It is also interesting that the earnings guidance was flat, not down as so many companies have done. You suggest discretionary spending is going to 'disappear'. Don't you find it odd that we are over one year into this recession and SYY is STLL not experiencing declines in sales and earnings? The stock is down from the high 30s to the low-mid 20s and earnings for this fiscal year could be flat to slightly up!

There are a lot of people who believe the economy will get much much worse, and you may be one of these. If so I understand your hesitancy. However SYY is an early cycle stock. When consumer confidence rebounds one of the very first things people do is eat out at a deli, fast food or restaurant. If you wait for the recovery to become apparant the stock will have already moved higher. It is extremely rare for this company's stock to trade this cheaply. I would be hesitant to short it unless you think the economy still has much further to fall (I do not).

The author has presented a high quality, defensive, high yielding stock trading at an historicly inexpensive price. Optimistic conservative investors really should take a look.

Jan 02 11:58 PM

[2009trader:]

There are many stocks that are trading at historically low valuations- then they go even lower. IMO Sysco is still in a downtrend and the shareprice is looking to go lower before it turns up towards the end of 2009.

I am not surprized that that SYY is has not experienced a decline in sales or profits at the end of Q3, as inflation was high for food for the first 3 qtrs and job losses and consumer spending really dropped of a cliff only in Oct/Nov. Listen to the restaurant owners if you don't believe me:

WASHINGTON, Dec. 31 /PRNewswire-USNewswire... -- The outlook for the restaurant industry worsened in November, as the National Restaurant Association's comprehensive index of restaurant activity fell to a record-low level. The Association's Restaurant Performance Index (RPI) -- a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry -- stood at 96.7 in November, down 0.4 percent from October and its 13th consecutive month below 100.


"The November decline in the Restaurant Performance Index was the result of broad-based declines across the index components, with the Current Situation index falling to a new record low," said Hudson Riehle, senior vice president of Research and Information Services for the Association. "A solid majority of restaurant operators reported negative same-store sales and traffic levels in November, while nearly one-half expect their sales in six months to be lower than the same period in the previous year."


"The continued deterioration in economic conditions is reflected in operator sentiment, with a record 47 percent of restaurant operators saying the economy is currently the number-one challenge facing their business," Riehle added. "Looking forward, restaurant operators aren't particularly optimistic about an improvement either, with 49 percent expecting economic conditions to worsen in six months."

It will get worse before it gets better. I think the author has presented the facts well, but just because the stock appears cheap by historic standards does not mean it will not go lower. It will be a good buy at $17, however going short SYY looks better than long right now.

Jan 03 02:35 PM

[jepittman:]

I respect your opinion 2009trader, but the stock market will turn upward before the economic recovery begins. If you wait for clear skies SYY will be considerably higher and the opportunity to get these shares really cheap will be gone.

It is possible we could see $17 a share. If we do would you buy then or wait for $14? These prices IMO would reflect a depression or a very long period of economic stagnation. If this is what you believe, stay in treasuries and/or CDs at virtually no yield. If you want outsized gains you must be willing to accept SOME risk. IMO the risk of decline from these depressed levels is far outweighed by the opportunity to accumulate shares of an outstanding company at fire sale prices.

Jan 04 04:08 PM

[2009trader:]

We simply have a difference in the view of risk and reward on SYY. By the way, I am not in treasuries or CD's with no yield. I will definitely not buy SYY now, but will buy at $17 and yes, if it drops to $14, I'll buy some more.

Good luck.

Jan 04 10:29 PM

[bucky0:]

Sysco derives some of their business from restaurants as well as from cruise lines and other hospitality industries (yes these may suffer nowadays) but Sysco also derives a great deal of their income from prisons, schools, hospitals, nursing homes and other institutions (these are likely to remain stable and or increase as crime rates and population counts rise and as the population ages). Perhaps this will provide a solid balance to any declinations.

Jan 04 10:47 PM

[jepittman:]

It is being reported tonight that the Obama Administration will propose a $300 Billion middle class tax cut in the form of payroll tax reductions as part of the economic stimulus package. This will indirectly impact SYY by adding dollars to consumers take home pay, already aided by falling gasoline prices and lower mortgage rates. It appears 2009 will be the year the economy begins to recover. It will not turn on a dime but the stage looks set for the rate of decline to slow appreciably. With things no longer getting worse, investors will soon look 'over the valley' to the recovery and begin accumulating stocks more aggressively. SYY along with most stocks in general will soon no longer sell for fire sale prices.

Jan 04 10:58 PM

[jepittman:]

Much of SYY's business is very stable as you say. With the economy in recession they are being affected but IMO not to the degree the price decline is suggesting. Consumers have experienced the shock of an en masse hedge fund wholesale liquidation and the uncertainty of a presidential election. A lot of optional spending has been deferred. As people's fears subside more normal consumption patterns should slowly reemerge, benifiting companies such as Sysco. The window is still open on a terrific company at a firesale price. IMO it will not remain open long.


On Jan 04 10:47 PM bucky0 wrote:

> Sysco derives some of their business from restaurants as well as
> from cruise lines and other hospitality industries (yes these may
> suffer nowadays) but Sysco also derives a great deal of their income
> from prisons, schools, hospitals, nursing homes and other institutions
> (these are likely to remain stable and or increase as crime rates
> and population counts rise and as the population ages). Perhaps this
> will provide a solid balance to any declinations.

Jan 04 11:06 PM

[deitrick67:]

i am currently working for sysco.Everyday as a team we continue to strive to improve our business and continue to keep establishments happy with our products,and give them the best business we can.We do supply local businesses but our major supplies[from our sysco house]go to the schools and hospitals in the area.We also supply food for sports arenas,concerts,fund raisers etc.I feel strongly about my workplace and will continue to jnvest in it.Thank you for your time

Jan 05 10:52 PM

[jepittman:]

You work for a terrific company. I know several Sysco employees and all would say something similar to what you posted. IMO your company has a bright future and so do you.

Also IMO buyers of this stock at near these levels are getting a bargain. The average annual pe ratio has not been this low in 15 years. I have NEVER known the stock to yield 4% or more. This window likely won't be open long.


On Jan 05 10:52 PM deitrick67 wrote:

> i am currently working for sysco.Everyday as a team we continue to
> strive to improve our business and continue to keep establishments
> happy with our products,and give them the best business we can.We
> do supply local businesses but our major supplies[from our sysco
> house]go to the schools and hospitals in the area.We also supply
> food for sports arenas,concerts,fund raisers etc.I feel strongly
> about my workplace and will continue to jnvest in it.Thank you for
> your time

Jan 09 05:32 PM