By Jack Barnes
The high cost of food and energy is eating away at companies like Sysco Corp. (SYY), the country's largest commercial food distributor.
Indeed, inflation has soaked up the dollar's purchasing power, forcing millions of Americans to slash discretionary spending. Furthermore, the U.S. Federal Reserve, through its lax monetary policy, has been exporting inflation to the rest of world. The resultant price increases in commodities have hit the wallets - not to mention the bellies - of many consumers, including those in the United States.
Making matters worse, global weather patterns last year shifted from El Nino into a La Nina pattern. This has caused rain patterns around the world to change, affecting crop yields in Russia, Australia, and China.
That's why the price of soft commodities used in the preparation of foods has risen exponentially over the past year. It's also why you should sell Sysco.
In fact, there are actually four reasons to sell Sysco Corp. stock:
- Rising energy costs.
- Inflating raw food costs.
- Shrinking discretionary funds.
- And dwindling earnings.
Four Reasons to Sell Sysco
The price of crude oil - and prices for the refined products that come from crude oil - has been rising lately. At a little over $86 a barrel, oil prices are up about 15% from where they were a year ago - and many analysts believe prices will test $150 a barrel by midyear.
It doesn't matter if it's diesel to run water pumps at a commercial farm or bunker oil for shipping, the cost of moving bulk food is increasing sharply. And the cost of food staples around the world is rising as a consequence.
Corn prices surged 69% in 2010, as U.S. production dropped by 4.9%. Coffee was up by 65% last year as weather conditions impacted the three largest cocoa growers. Meanwhile, wheat prices rose 47% and soybeans increased by 44%.
These staples, along with rice, have pushed up the cost of meals around the world, and the higher cost of dining out has customers looking for more affordable alternatives.
This affects Sysco's client base directly.
Founded in 1969, Sysco is the largest distributor of food and food-related products to commercial food providers in the United Sates. The company currently operates 186 distribution centers. It employs more than 46,000 people and serves approximately 400,000 customers.
Sysco has a market cap of $16.36 billion, with an enterprise value of $18.4 billion once you add in net debt.
Sysco stock in the last year has traded between $27.10 and $31.99. And it fell more than 6% last week following the company's earnings release.
Sysco reported second-quarter operating income of $437 million - a 5.5% decrease from $462 million in the year ago period.
See Full Earnings Call Transcript
"Our financial results for the second quarter reflect the unfavorable impact of certain market conditions and operational challenges that we were unable to fully overcome in the near term," said Sysco President and Chief Executive Officer William J. Delaney III. "Specifically, accelerating and significant food cost inflation negatively impacted our customers' purchasing budgets, contributed to increased gross margin pressure and meaningfully increased our selling expense. In addition, higher year over year pension and fuel costs also adversely impacted our ability to grow operating earnings over the prior year."
Make no mistake: Sysco is facing serious headwinds.
The company's margins are being hit, and when its customers cut back on expenses due to financial hardship, it shows up in Sysco's bottom line. So, it is time to think about booking any profits you've made, and stepping out of the way of economic reality.
"Sell" Sysco Corp. Let's put in a market order to get out of Sysco, and look to deploy those funds on an investment that is leveraged to food inflation, instead of holding on to SYY at this point.