Good Things Come From Sysco

Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The food retail and distribution segment has been growing due to the increased preference of consumers towards take out foods. The foodservice market in the United States and Canada is ~$225 billion. According to industry sources, the foodservice, or food-away-from-home, market represents approximately 46% of the total dollars spent on food purchases made at the consumer level in US. This segment is highly fragmented, and is comprised of ~15,000 companies. This sector is characterized by high inventory turnovers with relatively low profit margins and is susceptible to changes in economic activity. During the recent economic recession, many companies faced declining sales and lower margins as consumers preferred to stay at home rather at eat out. (Source: company annual report)

Sysco Corporation (NYSE: SYY) is the largest North American distributor of food and related products primarily to the foodservice or food-away-from-home industry. It serves ~17.5% of this market (as per company's annual report). The company provides products and related services to approximately 400,000 customers, including restaurants (63% of FY11 sales), healthcare and educational facilities (16%), lodging establishments (5%) and other foodservice customers (16%).

Just like its motto “Good things come from Sysco,” in comparison with its competitors the company does provide a good investment opportunity. Let us take a look at Sysco vs. its two competitors United Natural Foods Inc (NASDAQ: UNFI) and Core-Mark Holding Company, Inc (NASDAQ: CORE).

  • United Natural Foods is a distributor of natural, organic and specialty foods and non-food products in the United States and Canada, and operates 26 distribution centers.
  • Core-Mark is a marketer of fresh and supply solutions to the convenience retail industry in North America, providing sales and marketing, distribution, and logistics services to customer locations across the United States and Canada

Growing Sales

Sysco is the larger food service distribution company, with average annual sales of $39 billion, vs. its peers United Natural Foods and Core-Mark with sales of $4 billion and $7 billion, respectively. However, Sysco's sales have been slowing down vs. its competitors. From 2007-2011, Sysco posted sales CAGR of only 3%, vs. 9% at United Natural Foods and 8% at Core-Mark.

But, on the operating margin front, Sysco scores with a 4.5%, vs. 3% from United Natural Foods and 0.56% by Core-Mark. Sysco also gains when it comes to its size, which gives it a huge advantage when negotiating with its suppliers. Furthermore, it is largely diversified, as it doesn't supply only to restaurants but also to schools and hospitals. On the other hand, United Natural Foods face product concentration as it supplies organic and specialty food products.

Dividend Policy

As an investor, my primary parameter for an investment would be a company's dividend policy. Here again, Sysco wins. Sysco started paying out dividends in 1965, and since then has slowly but certainly increased it. Sysco has a dividend yield of 3.3% (5-year average dividend yield is 3.6%), with a payout ratio of 59%.

Meanwhile, United Natural Foods does not have a dividend policy in place, and Core-Mark only commenced dividend distribution in Oct. 2011. Core-Mark has a dividend yield of 1.5% and a payout ratio of 27%.

Sysco scores again, and its dividend policy is sustainable given its strong operating margins.

2Q12 Results

Sysco reported a 5.4% increase in its 2Q12 results due to a 2.8% growth across its segments, mainly driven by acquisitions. Operating income decreased 10.4% mainly due to $45 million increase in business transformation expenses, $22 million in charges related to certain items, and a $17 million increase in payroll expenses. Excluding certain items and the transformation expenses, operating income grew 4.6%.

Conclusion

Although the restaurant industry is facing some pressure, I wouldn't consider it as a major concern for Sysco, as 40% of its revenues is derived from sources other than restaurants. Furthermore, the company's stock price is fairly stable, providing a return of 11% in the last year. Apart from share price appreciation, the company has recently announced a dividend of $0.28.

The company is focused on sustainable growth, improving margins and optimizing its asset management in order to generate additional cash flows. This is corroborated from the recent December 2012 acquisition of 4 foodservice companies with a combined revenue of $520 million. Sysco is aggressively growing through acquisitions, and in FY2013 it acquired a total of nine businesses with combined annual sales exceeding $750 million. Furthermore, the company's fundamentals are strong and its stock forms one of the biggest holdings of Yacktman Asset Management. The investment firm has invested about 5% of its total assets in the company. Institutional holding and hedge fund buying is always a good sign for any stock (Source: DailyFinance).

Given the above with the added advantage of reliable and ever-increasing dividend, Sysco appears to be a good buy.


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