Sunday, May 17, 2009
Tuesday, May 12, 2009
Wednesday, May 6, 2009
Monday, May 4, 2009
I mentioned last week that Sysco Corporation is my favorite stock. They reported quarterly earnings today, and I listened to the conference call. Some thoughts:
1) Sysco dominates its industry (Institutional Foodservice Distribution). There are two principal nationwide competitors, dozens of regionals, and literally thousands of local distributors. Both of the national competitors (U.S. Foodservice and Performance Food Group) are owned by private equity firms. This isn’t a great industry for private equity investment, and I’m sure that the PE firms are looking to exit at the very first opportunity. Why is this important? Because you run a business differently if you’re looking to maximize near-term profitability. Sysco can afford to make longer-term business investments and plans.
2) In difficult economic times, small competitors get squeezed hard. This is a scale business—bigger is better. Sysco is much better positioned to ride out the recession. Meanwhile, many smaller competitors fold or look to merge with a stronger partner. Sysco has traditionally grown through acquisition, and they’re seeing a significant pickup in acquisition opportunities, presumably at attractive prices.
3) Few investors and analysts really understand Sysco. It’s covered by 10 sell-side analysts. Two have “buy” ratings, the rest are “neutral” (that in itself is a positive sign). The analysts are typically specialists in the food industry (Heinz, General Mills, Kraft) or the retailing industry (Safeway, Walgreen, Costco). But Sysco is really a transportation logistics company. Their essential function is to manage the movement of millions of cases of merchandise from thousands of SKUs to tens of thousands of customer locations. They buy, pick up, store, assemble orders, load and route trucks, deliver, invoice and collect. It’s not a retailer, and they don’t make food. It really should be covered by transportation analysts. Lucky for us that it’s not.
4) Thirty years ago, as large mainframe computers were becoming widespread in local distribution centers, an industry executive predicted that the company with the best information technology would dominate the industry. This business has billions of discrete bits of data, from individual case costs and prices to truck routing, freight consolidation, and inventory management. Superior IT can squeeze costs, and in a low margin business like this every basis point counts. Sysco is well ahead of all competitors on this measure. It's a difficult task in the industry, particularly for companies built by acquisitions. Interestingly, Sysco alluded on the today’s conference call to some future announcements about benefits from the integration of its software systems.
5) Inflation generally helps Sysco’s margins. A 10% markup on a $20 case of product remains 10% if the product’s price goes up to $21, but the gross profit dollars increase by 10 cents/case. I don’t want to overemphasize this point, but it seems as if the disinflationary environment that has prevailed in the past few years has flattened out and might start to provide an additional tailwind.
6) The stock is cheap at 12 times next year’s estimated earnings. Because of their record of stable growth, it has often sold at 20 to 30 times future earnings. By most measures (price to cashflow, price to sales, price to book, etc) it’s at the lowest level in at least 20 years. Yet the competitive environment has never been more opportune. Solid balance sheet, A1/A+ credit rating, and a 4% dividend.
This is an investment, not a trade. If the economy remains weak, the restaurant industry will continue to suffer. However, as things recover I believe that Sysco is very well positioned deliver improving business results and a higher stock price.