Sysco: Reasonable Price for a Dominant Company

Sysco (SYY) is a company that we really like now, and for the long run. We find the stock very compelling at its current price ($22). It is the dominant food distributor to the restaurant industry with sales of over $37 billion. It also sells to customers in the healthcare, educational and lodging industries.

Sysco also has a very large private label business (with over $12 billion in sales) that makes it one of the largest food companies. In tough economic times, restaurants may find that shifting to the Sysco brand makes a great deal of economic sense.

Sysco’s size gives it a cost advantage over its competitors that can be used to benefit its customers and its shareholders. The company has been embarking on a huge redistribution plan that should allow it to lower costs, improve productivity and reduce inventory. Sysco is also focused on doing more centralized purchasing (in the past it let its individual operating companies purchase items separately). And Sysco is focused on making its transportation system even more efficient. Sysco has the largest private fleet of trucks in North America. So far this fiscal year, it has been able to reduce its miles driven by 10 million. Given the cost of fuel, that translates into real savings. These initiatives will lead to a significant improvement in margins at Sysco.

Of course, during tough economic times, people may eat out less and restaurants will close at a more rapid pace. These are certainly factors that could hurt sales. But we think it could benefit Sysco as restaurant owners consolidate their suppliers. Sysco also has a Business Review program in which it works closely with its customers to help them operate more effectively. This program has led to Sysco becoming a more valued supplier and increasing its sales.

While the company has about $2 billion in debt (compared to $300 million in cash), they issued $500 million in new notes this month, so liquidity is not a concern. The company indicated that it has no immediate needs for the funds, but was taking advantage of attractive rates in the marketplace. Sysco carries an AA- rating from S&P. Only $7.5 million of Sysco’s debt is due in the next 12 months.

The company is committed to returning money to its shareholders. Sysco is a Dividend Aristocrat, meaning it has increased its dividend annually for at least 25 years. At the end of last year, it raised its dividend by 9% and the yield is now 4.4%. The dividend payout ratio is 53%. Sysco has also repurchased at least $500 million in stock in each of the last 5 years and has reduced its shares outstanding by over 50 million shares during that period.

Bottom line, Sysco is expected to earn around $1.80 in FY2009 ending in June. Assuming they earn a similar amount the following year, Sysco is trading at just over 12x forward earnings. This is a pretty reasonable price to pay for such a dominant company. The valuation coupled with a 4.4% dividend yield makes this a very interesting stock.

Disclosure: Harvest Financial Partners owns Sysco in its client portfolios. The author owns Sysco in his personal portfolio. Positions may change at any time.

Comments

[Chris B:]

"Of course, during tough economic times, people may eat out less and restaurants will close at a more rapid pace. These are certainly factors that could hurt sales. But we think it could benefit Sysco as restaurant owners consolidate their suppliers."
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Why would supplier consolidation help restaurants, unless they are getting discounts from Sysco for doing it? If anything, mostly empty restaurants are probably ready to spend the time to find cheaper sources.



"The valuation coupled with a 4.4% dividend yield makes this a very interesting stock."
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I agree, the valuation looks very reasonable for a company with such a wide moat. However, the dividend is little more than a return of shareholder's own capital and a tax trigger. If you want that 4.4% just place a limit order on any stock at 4.4% less than the current price instead of a market order. With current volatility, such an order should execute within a day or two on almost any stock or fund!

Mar 24 11:04 AM

[jepittman:]

Discounts depend on volume. Greater volume to a restaurant reduces per unit supply costs. Its really a logistics game with several moving parts. According to a friend who works at one of Sysco's supply warehouses business is pretty flat but he also says restaurant traffic picks up almost immediately when the economy improves. Some call this an 'early cycle' business because it is so sensitive to economic changes.

Sysco is a good business for long term conservative equity investors. Volatility is lower than the market, it pays a consistent and growing dividend, earns a high return on equity capital (routinely around 30% according to Value Line), and dominates the markets it serves. The next time you eat at your favorite restaurant look around for what I call 'Sysco signs'. It may be a private lable box in or near the kitchen, the name on the individual sweetner packets on the table or the coffee supplies near the coffee maker. If it is an individually owned restaurant chances are they are supplied by Sysco.

Incidently Barrons Online (subscriber site) has a good writeup today that compliments the above article. One other thing pointed out in that article is Sysco's large business with schools, hospitals, military installations, nursing homes and cruise ship lines.

Mar 24 02:59 PM

[E Nuff Sed:]

Solid balance sheet, great dividend, wide moat, fair price - works for me.

Mar 24 10:26 PM

[REBEL:]

Hey Chris B - Yes, the world economy could implode and make all stocks worthless. But people will eat 'til the end of time.

Mar 25 08:52 PM

[jepittman:]

And they will eat cold soup at home only so long. Friends and family becon at yon restaurant and we will go.


On Mar 25 08:52 PM REBEL wrote:

> Hey Chris B - Yes, the world economy could implode and make all stocks
> worthless. But people will eat 'til the end of time.

Mar 26 09:56 PM