This Company Could Become One of Buffett's Favorites (Part 3)
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In previous articles, I wrote about Archer Daniels Midland and Mosaic. Those two stocks belong to the Thomson Reuters' list of 28 stocks that have similar characteristics to those that Warren Buffett has bought in the past. In this article, I will talk about another consumer non-cyclical business in that list. It is Sysco (NYSE: SYY), a North American distributor of food and related products to the Foodservice, or the food-away-from home, industry. Let’s dig deeper to see whether or not we should be bullish on Sysco.
The largest North American food distributor
Sysco, founded in 1969, is considered to be the largest distributor of food and products to around 400,000 customers, including restaurants, hospitals, schools, industrial centers, and Foodservice customers in North America. The company distributes a wide variety of products, including canned and dry products (19% of total sales), fresh and frozen meats (19%), frozen fruits, vegetables, bakery (14%), dairy products (19%), poultry (10%), etc.
The majority of its sales, $26.7 billion or 63% of the total sales, were generated from restaurant customers. Hospital and nursing homes ranked second, accounting for 10% of 2012 total sales. The products Sysco distributes are sourced from a diverse base of suppliers. No single supplier accounts for more than 10% of the total purchases.
Value investors might fall in love with Sysco, with its consistent record for growing both its top and bottom lines. Revenue increased from $26.14 billion in 2003 to $42.4 billion in 2012, while EPS rose from $1.18 to $1.90 during the same period. Furthermore, Sysco is known to be a cash cow, generating consistent positive operating cash flow. Over the past 10 years, operating cash flow has fluctuated in a range of $885 million to $1.6 billion. Last but not least, the return on invested capital has always been in double-digits, staying in the range of 13.93%-22.74%.
Huge economies of scale and efficient operation
Sysco possesses huge economies of scale, with its large national distribution network serving 400,000 customers in North America. In addition, it distributed a diverse selection of food products. Those two characteristics have given Sysco a wide moat that couldn’t be matched by smaller peers such as United Natural Foods (NASDAQ: UNFI) and Core-Mark (NASDAQ: CORE).
United Natural Foods is serving around 23,000 customer locations in the U.S. and Canada, while Core-Mark has more than 28,000 customer locations in 50 U.S. States and five Canadian provinces. Among the three, Sysco generated the highest net margin at 2.48%, while the net margins of United Natural Foods and Core-Mark were only 1.8% and 0.33%, respectively.
Interestingly, even with the large inventory base of nearly $2.4 billion and receivables of $3.17 billion as of December 2012, Sysco could still quickly collect its cash. In the past 10 years, its cash conversion cycle (CCC) has stayed around 20–24 days only. United Natural Foods’ CCC is more than double, fluctuating in the range of 45–51 days. Core-Mark seems to be as good as Sysco in managing its working capital, with the CCC ranging from 19–26 days.
Quite cheaply valued
Sysco is trading at nearly $33 per share, with a total market cap of around $19 billion. The market is valuing Sysco at only 8.35 times EV/EBITDA. United Natural Foods is a much smaller company, with nearly $2.5 billion in total market cap. At the current trading price of around $50 per share, the company is valued more expensively at 12.67 times EV/EBITDA. Core-Mark, the smallest company, is worth around $550 million on the market. At the current trading price of around $48 per share, the market is valuing Core-Mark at only 7.35 times EV/EBITDA, the cheapest valuation among the three.
Foolish bottom line
I personally think that with huge economies of scale and an efficient operation, Sysco should deserve a much higher valuation than the current market valuation. If Sysco is valued at around 12 times EV/EBITDA, it would be $46 per share, a 44% premium on its current trading price.
hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Sysco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!