Seeking Alpha
Follows Benjamin Graham method, deep value, value, long only
Profile| Send Message|
( followers)  

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Sysco Corp. fares in the ModernGraham valuation model.

SYY Chart

SYY data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. 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
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$35.74
MG Value$16.55
MG OpinionOvervalued
Value Based on 3% Growth$26.57
Value Based on 0% Growth$15.58
Market Implied Growth Rate5.50%
Net Current Asset Value (NCAV)-$2.03
PEmg19.50
Current Ratio1.74
PB Ratio3.94

Balance Sheet - 12/28/2013

Current Assets$6,520,900,000
Current Liabilities$3,749,300,000
Total Debt$2,944,100,000
Total Assets$13,013,000,000
Intangible Assets$2,107,500,000
Total Liabilities$7,709,200,000
Outstanding Shares584,290,000

Earnings Per Share

2014 (estimate)$1.84
2013$1.67
2012$1.90
2011$1.96
2010$1.99
2009$1.77
2008$1.81
2007$1.60
2006$1.35
2005$1.47
2004$1.37
2003$1.18

Earnings Per Share - ModernGraham

2014 (estimate)$1.83
2013$1.84
2012$1.91
2011$1.89
2010$1.80
2009$1.67

Dividend History

SYY Dividend Chart

SYY Dividend data by YCharts

Conclusion:

Sysco Corp. is a company that should be on the Enterprising Investor's watch list, but it does not qualify for the Defensive Investor due to its low current ratio, lack of sufficient earnings growth over the ten year period, and the high PB ratio. The company does pass all five requirements of the Enterprising Investor. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company while also reviewing 5 Low PEmg Companies for the Enterprising Investor and keeping in mind the 7 Key Tips to Value Investing.

From a valuation side of things, the company's lack of growth in earnings results in an overvalued rating. The company's EPSmg (normalized earnings) have grown from $1.80 in 2010 to only an estimated $1.83 for 2014. This very low level of growth does not support the market's implied estimate of 5.50% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Sysco Corp.? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Sysco Corp. (NYSE:SYY) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Sysco Corp.- April 2014