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Sysco (NYSE:SYY) is the leading food-service distributor in the United States and Canada, with around 17% share. Through more than 150 acquisitions since its founding about 40 years ago, Sysco has developed a wide-reaching distribution network. I added Sysco to my list of investment ideas following a screening of stocks in one of morningstar’s newsletters.

Over the last month, SYY traded between $28 and 30.

Please refer to the stock review explained post if you have questions on what I look for in this analysis.

1- Business Performance Risk (+/=) and intrinsic returns (+/=)

Metric

Status

FCF / Sales

FCF over sales is currently at 0.8%, lower than in recent years, due to a drop in FCF (including FCF/net income). Over the last 10 years, SYY FCF/Sales has usually been between 2% and 3%

ROE

LTM at 30%+, in line with performance over the last 10 years.

ROA

Currently at 11.5%, slightly above the average over the last 5 years (10.8%)

Revenue Growth

Revenue growth has slowed over time, with a 3 year average of 2%, below the 5-year average of 4%. 2009 was a negative year for SYY but the company seems to be rebounding.

Cash distribution to shareholders

Dividend: SYY pays a yield of 3.4%, on a payout ratio of almost 50%.

Stock repurchases: Over the last 5 years, the company has repurchased about 10% of its stock.

Overall, SYY’s business seems ok. While the FCF generation as a percentage of sales is not high, this is somewhat counterbalanced by a good ROE and acceptable ROA. I looked a bit more into the FCF statement to better understand the recent drop, which seems driven by a few things: increase in inventories back to a level more in line with historical (2009 saw a decrease in inventory but was an exception), negative deferred taxes after years of positive ones, a large increase in “other non working capital” - again in line with historical but different vs. 2009. To me, the biggest question is what drives the change in taxes deferred when it used to be very positive for cash and has now turned negative…something to explore in my more in-depth stock analysis if/when I do one.

Revenue growth is also a question mark, after years of good performance, demand slowed in 2009/10. Analyst consensus is around 10% for now, which seems aggressive to me.

Turning to intrinsic stock returns, an investor could get:

- 3.4% dividend yield on a payout of 50%

- 3 to 5% growth, using 10-15% of earnings using a ROE of 30%

- 2% buybacks with the remaining 35% of earnings, using the current earnings yield of 6.8%

All in all, one can expect intrinsic returns of over 10%, making my personal hurdle.

2- Balance Sheet Risk (+)

Metric

Status

LT Debt / Equity

Currently at 0.65x, a leverage which has been consistent over the last 10 years.

Current Ratio

1.7x, which seems reasonable for the industry and higher than what SYY has been able to manage in the past

Both the current ratio and leverage appear manageable and are reasonably conservative.

3- Valuation Risk (=)

Metric

Status

Cash Return

1.5%

Price to earnings ratio

14.8x, in line with the S&P and below the 5-year average of 18.6x

While the price to earnings ratio appears to be ok – although not cheap – I am a bit concerned by the cash return of only 1.5% at this point. As mentioned above, FCF may be a bit understated over the last 12 months, but even going back to previous levels, cash returns would only rise to 3%.

Conclusion

Overall, SYY appears to have a good business and is financed conservatively. However, current valuation seems to be a bit high to provide a good enough margin of safety. I will wait until the price decreases by 15% or so to perform a more in-depth analysis of the stock.

Have you looked at SYY recently? What was your conclusion?

Disclosure: No position

Source: Sysco Stock Review: Not So Tasty