Here is a look at how SYSCO Corporation (SYY) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|Value Based on 3% Growth||$26.14|
|Value Based on 0% Growth||$15.32|
|Market Implied Growth Rate||5.83%|
|Net Current Asset Value (NCAV)||-$2.22|
Balance Sheet - 9/30/2013
Earnings Per Share
Earnings Per Share - ModernGraham
Sysco Corp. is a very intriguing company to the Enterprising Investor, but not the Defensive Investor. The company's lack of earnings growth over the ten-year period, along with its high PEmg and PB ratios and its low current ratio, disqualify it from suitability for the Defensive Investor. The Enterprising Investor's requirements are all satisfied, however, so that investor type should feel comfortable proceeding with further research, beginning with a comparison to some other Enterprising Investor companies.
From a valuation standpoint, the company has not had sufficient growth in its earnings, with EPSmg (normalized earnings) only growing from $1.67 in 2009 to an estimated $1.80 for 2014. The market is currently implying a growth rate of 5.83%, which is higher than the historical performance supports. As a result, the company appears to be overvalued.
What do you think? Do you agree that Sysco Corp. is overvalued? What would be your assessment? Is the company suitable for Defensive Investors or Enterprising Investors?
Disclosure: The author did not hold a position in Sysco Corp. (SYY) at the time of publication and had no intention of changing that position within the next 72 hours.