6 Reasons To Like Sysco Covered Calls

Given the rocky market over the last six months, it doesn’t hurt to have some solid longer term positions to help weather the storm. I recently purchased shares in the leading food distributor, Sysco (SYY) and wrote a long term covered call against part of it (Jan 2010- 35). Here are some reasons I like Sysco, along with one potential negative:

1) Sysco has a high A+ quality rating from S&P. Using a football analogy, Sysco is like Bronco Nagurski, the legendary Pittsburgh Steeler running back who would grind out first downs by gaining three to four yards at a time. Here is a Nagurski story I like- One day, Bronco charged toward the goal line, head down, shoving tacklers out of the way, and ran passed the end zone and smacked his head into the surrounding brick wall at Wrigley Field. When he came back to the bench, he told coach George Halas, "That last guy gave me quite a lick!"

Take a look at Sysco's long term quarterly numbers for revenues and earnings. There have been steady increases over the last 5 years, and increasing dividends, but the stock price has stagnated in the 30 range because of P/E contraction.

Revenues (Bill)
2003 26.1
2004 29.3
2005 30.3
2006 32.6
2007 35.0

Earnings Per Share
2003 1.18
2004 1.37
2005 1.47
2006 1.35
2007 1.60
2008 (est) 1.79

2) Sysco has consistently generated returns on equity of 25% or more. Here are the ROE numbers for the last eight calendar years (quite impressive): 31.6, 29.1, 36.1, 38.1, 35.9, 32.1, 30.5, 28.5

3) Gaining market share- Sysco has a 15% market share in food distribution. Two of its biggest competitors recently were acquired and have been closing plants. U.S. Foodservice has about an 8% share and is currently owned by private equity firms Clayton, Dubilier & Rice and Kohlberg Kravis Roberts after being sold by former parent Royal Ahold in mid-2007. Performance Food Group was acquired a few months ago at a 43% premium by Blackstone Group and Wellspring Capital Management. Given the recent credit crisis, I feel that private equity firms are no longer such strong players. They will be looking to cut costs and sell out at a profit. Sysco should be able to pick up considerable market share over the next few years.

4) Roll-up strategy: From its inception through end of 2007, Sysco has acquired 141 companies or divisions of other companies.

5) Share repurchases: In Fiscal year 2007, Sysco re-purchased 16.2 million shares. As of January, they have re-purchased 13.1 million shares in 2008 with remaining authorization of 10 million shares.

6) One potential negative that may explain why SYY is currently available at a good price is
high gasoline prices. But this also affects Sysco’s competitors, and the higher fuel prices will eventually be passed along to customers.

I like SYY at this price level, but I don’t see a huge upside. That is why I wrote some Jan. 2010 covered leaps (strike price 35) against a portion of my long position. Given Sysco’s 3% dividend, I wouldn’t mind so much if the stock gets called away at 35.

Comments

[granger]

A favorite long term holding of mine (started accumulating again below 30 aggressively). Thanks for the covered call idea.

[ekayaker]

Nice write-up. Much appreciated.

SYY has been on my buy list for a decade. It was always too pricey. I finally bought a position in this great company. I hesitate to sell covered calls on a stock that I waited for so long to buy. I'd
feel terrible to have it called away for just a little premium income. I want to own a long term compounding machine, which I hope SYY is.

Also, SYY seems like a good way to play a decline in the price of oil, which many think is in bubble territory. Instead of shorting oil, which could be costly, I think it makes sense to buy a company that will benefit from a decline in gasoline prices. SYY is such a company.