Sysco: My Favorite Stock

I mentioned last week that Sysco Corporation (SYY) is my favorite stock. They reported quarterly earnings yesterday, and I listened to the conference call. Some thoughts:

1. Sysco dominates its industry (Institutional Foodservice Distribution). There are two principal nationwide competitors, dozens of regionals, and literally thousands of local distributors. Both of the national competitors (U.S. Foodservice and Performance Food Group) are owned by private equity firms. This isn’t a great industry for private equity investment, and I’m sure that the PE firms are looking to exit at the very first opportunity. Why is this important? Because you run a business differently if you’re looking to maximize near-term profitability. Sysco can afford to make longer-term business investments and plans.
2. In difficult economic times, small competitors get squeezed hard. This is a scale business—bigger is better. Sysco is much better positioned to ride out the recession. Meanwhile, many smaller competitors fold or look to merge with a stronger partner. Sysco has traditionally grown through acquisition, and they’re seeing a significant pickup in acquisition opportunities, presumably at attractive prices.
3. Few investors and analysts really understand Sysco. It’s covered by 10 sell-side analysts. Two have “buy” ratings, the rest are “neutral” (that in itself is a positive sign). The analysts are typically specialists in the food industry (Heinz (HNZ), General Mills (GIS), Kraft (KFT)) or the retailing industry (Safeway (SWY), Walgreen (WAG), Costco (COST)). But Sysco is really a transportation logistics company. Their essential function is to manage the movement of millions of cases of merchandise from thousands of SKUs to tens of thousands of customer locations. They buy, pick up, store, assemble orders, load and route trucks, deliver, invoice and collect. It’s not a retailer, and they don’t make food. It really should be covered by transportation analysts. Lucky for us that it’s not.
4. Thirty years ago, as large mainframe computers were becoming widespread in local distribution centers, an industry executive predicted that the company with the best information technology would dominate the industry. This business has billions of discrete bits of data, from individual case costs and prices to truck routing, freight consolidation, and inventory management. Superior IT can squeeze costs, and in a low margin business like this every basis point counts. Interestingly, Sysco alluded on the today’s conference call to some future announcements about benefits from the integration of its software systems.
5. Inflation generally helps Sysco’s margins. A 10% markup on a $20 case of product remains 10% if the product’s price goes up to $21, but the gross profit dollars increase by 10 cents/case. I don’t want to overemphasize this point, but it seems as if the disinflationary environment that has prevailed in the past few years has flattened out and might start to provide an additional tailwind.
6. The stock is cheap at 12 times next year’s estimated earnings. Because of their record of stable growth, it has often sold at 20 to 30 times future earnings. By most measures (price to cashflow, price to sales, price to book, etc) it’s at the lowest level in at least 20 years. Yet the competitive environment has never been more opportune. Solid balance sheet, A1/A+ credit rating, and a 4% dividend.

This is an investment, not a trade. If the economy remains weak, the restaurant industry will continue to suffer. However, as things recover I believe that Sysco is very well positioned deliver improving business results and a higher stock price.

Disclosure: The author is long SYY.

Comments

[nyoneway:]

With some many beaten down stocks even after the recent run-up, I fail to see how a 12:1 forward PE seems that exciting. Inflation does not neccessarily translate to higher profits because consumers will adjust their spending by buying less and focus on lower cost items.

Another factor is that fuel prices now are relatively low compare to the Summer of 2008, it'll be interesting to see how Sysco cope with the inevitable rise in fuel prices.

May 05 02:18 PM

[jepittman:]

SYY has not 'run-up'. That is one of the points the author makes. It is selling at the lowest PE in decades, and no one is interested (or excited). If you want an indication of how SYY copes with higher fuel prices look at the past year. Diesel fuel more than doubled, then fell by 50%. The company has already faced this potential problem. People will not stop eating meals away from home. They will trade down the menu, perhaps go out less frequently, but they won't stop altogether. The slowdown is already priced in. A recovering economy and a more confident consumer is not. The stock will be well over 30 in a year and over 40 in two.


On May 05 02:18 PM nyoneway wrote:

> With some many beaten down stocks even after the recent run-up, I
> fail to see how a 12:1 forward PE seems that exciting. Inflation
> does not neccessarily translate to higher profits because consumers
> will adjust their spending by buying less and focus on lower cost
> items.
>
> Another factor is that fuel prices now are relatively low compare
> to the Summer of 2008, it'll be interesting to see how Sysco cope
> with the inevitable rise in fuel prices.

May 05 05:33 PM

[E Thomas St.:]

Sysco is gross though.

May 05 07:15 PM

[Smydauf:]

This would clearly be a person that despite (possibly) reading the article still has no clue what Sysco does:

On May 05 07:15 PM E Thomas St. wrote:

> Sysco is gross though.

This is the first informed and accurate assessment of SYY I have ever read. Now shut up, I don't want anyone else to find out about it...

May 05 10:43 PM

[E Thomas St.:]

They supply "The Cheesecake Factory" and that's all I need to know about their quality.

May 06 01:13 PM

[clm2112:]

SYY - Hmmm.. Loyalty to my non-publicly traded employer prevents me from being overly exubirant about the competition ;-)

That said, they should be seeing the same benefits we are at present. The real stress was about this time last year, when trying to absorb large fuel surcharges at the same time as not-so-well run customers were closing. The past year has cleaned out the weakest restaurants and distributors. Those that remain are ordering large case counts and paying their bills...both of which are welcome in the foodservice distributor business.

So, since you can't invest with my employer, you might as well go with Sysco. (And as an aside, the Private Equity firms are unlikely to bail from the other two. As bad as the economy may be, we're still making money for them...a lot better than some of their other investments ;-)

May 19 04:05 PM

[CES:]

Sysco is now expanding in Ireland so it follows that they are still in an expansion mode and there are plenty of opportunities for the company to keep growing. This is what Sysco has done since it was first formed and they certainly know how to do it. The management is in control of the company and treats their employees fairly as well as their suppliers. In short-they know what they are doing.

May 22 02:09 PM