Monday, May 4, 2009

Sysco Foods

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.  


  1. What do you think of PIR?

  2. I don't have any special insight. It's having a good day today (+11% as I write this). But it's not the kind of stock that I would buy-- far too speculative. That doesn't mean that it can't double or triple or more. You can make (or lose) a lot of money bottom-fishing in stocks like this. It's just not my style.

  3. Do you know how Sysco's sales break down by customer type (i.e., high-end restaurants, chains, etc.) -- or something like that?

  4. Sysco is interesting, they have a nice dividend that has grown consistently over the years, which is something I like. They are also very strong financially which is important now more than ever.

    I am wondering however, do they still have plenty of room to grow in the US and Canada? I know the industry is huge (200b?) but can they really continue to gain market share or will they start getting to the point where they can only grow as fast as the underlying market?

    Are there any plans to expand overseas that you know of?

    Thanks for any insights.


  5. The latest 10K provides this breakdown of sales: Restaurants 63%, Hospitals and nursing homes 10%, Schools and colleges 5%, Hotels and motels 6%, and Other 16%. Most of the restaurant category is represented by independents and small chains, but a significant part is made up of large chain restaurants. The largest customer by revenue is the Wendy's chain, which made up 5% of fy2008 revenue, and a smaller percentage of profits.

    The broadline restaurant business produces the highest margins and highest share of total operating income. However, it also has higher expenses due to greater delivery costs, bad debt expense, sales commission expense, etc.

  6. They say that they have about 16% of a $231 billion market. However, that depends on how you define the market. I've seen estimates as high as $400 billion. Of course, much of that business may not be a good fit for Sysco, but in any case I believe they can grow domestic share for quite a while.

    They have a significant presence in Canada with over 20 distribution centers. They recently announced the acquisition of a foodservice distributor in Ireland, which I believe is their first move outside of North America. However, they do have a small subsidiary called International Food Group which ships product to over 120 countries, primarily to service international chain customers.

    Management said recently that while their primary focus is North America, they continue to explore and stay abreast of international acquisition opportunities.

  7. Just wanted to circle back and say thanks for sharing your thoughts. I have SYY on my buy list but am hoping to see a correction in the overall market that takes SYY down a bit.


  8. Thank you for your comments and may you enjoy great success at UBS.

    I would simply add on SYY that the current environment is the downside for Sysco - and that down side involves positive earnings, positive cash flow, and increasing its competitive advantage. This is a great company for those who are patient.

    As for Jeff's comment: I'm less concerned about growth. Many companies have produced fine long term results with modest volume growth. It is important to realize that the U.S. population will continue to grow and that rising standards of living translate into more people eating at resteraunts. This provides sufficient long term growth for the industry for Sysco to grow earnings and dividends fast enough to outperform the S&P 500 in terms of total return.