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By James P. Miller

When the going gets tough, Americans start making what Sysco (SYY) CEO William DeLaney has delicately called “value-based spending decisions.”

That means dinner at home, instead of going out. Not taking a prospective client out for a big credit-card lunch. Bringing a bag lunch to the office instead of running out for a quick salad, because you’re afraid your job may be axed any day.

All those dang value-based decisions sent restaurants into a tailspin, and naturally damaged earnings at Sysco, the nation’s leading restaurant supplier. Sysco shares got hammered during the recession. Even now, after a substantial rebound – and the help of a hefty 3.46 percent dividend yield – the stock’s five-year record (like the S&P) shows it going nowhere.

As the economy strengthens, more people are venturing out to restaurants, and Sysco’s order book is beginning to fatten. A bit. But now, a new hazard has appeared on the horizon: rising food prices.

When inflation levels are low, Sysco can pass the modestly higher costs along to restaurants (and the nursing homes, sports arenas, and college dorms it also serves) with little trouble. Sometimes (“shhhh”) it can even benefit from the trend, bumping the price hike a bit above inflation to help its margins.

But when inflation really takes off, restaurant customers balk and Sysco may have to, well, eat the higher food costs in the short term.

In the fiscal quarter ended Sept. 30, Sysco’s revenues showed a solid 7.4 percent upturn, in contrast to the year-ago period’s 8 percent decline. Order volume is improving, it’s true. But year-ago sales were suppressed by a 3.4 percent drop in food prices, while food prices climbed by 3.3 percent in the latest quarter. That’s a big swing (meat, dairy and seafood were up almost 10 percent) and while it raised top line growth, it helped pinch the Houston company’s bottom line.

Sysco’s been spending money pretty briskly on capital projects that include new distribution centers and a centralized software system that should begin to yield efficiencies as it comes online this year. But share-repurchase outlays have been relatively modest of late.

Many investors think of Sysco primarily in terms of its dividend. But even though Sysco has raised its dividend yearly for forty consecutive years, its payouts have only really blossomed to make it a dividend growth stock over the past several years.

And that rate is slowing. Last month, for the second year in a row, the company increased its dividend by only a penny, to 26 cents a share payable in late January.

That trend, while understandable as the company wrestles with a still-soft market and suddenly rising input costs, could put a damper on Sysco shares in the future. Margins are also under pressure from the company’s recent launch of a “strategic pricing initiative” — it’s not just discounting, officials say — designed to generate increased volume in the future.

Despite such stressors, YCharts Pro finds Sysco shares undervalued on a fundamentals basis. And to be honest, the company’s current multiple does seem attractive by historical standards.

Sysco is making the right moves by cutting costs and seeking operating efficiencies, and appears to be claiming additional share in a fragmented foodservice market. But with food prices poised for what promises to be a big jump, this is a company with a lot on its plate.

Disclosure: No position

Source: Sysco: Waiter, There’s a Fly in My Revenue Stream