Houston-based Sysco Corp. (SYY, Financial), a $26.7 billion food distributor, reported 11.5% revenue growth to $40.95 billion in its third-quarter 2017 earnings and a more impressive 14% profit growth to $837.3 million resulting in 2% margin, which was the same level of profitability in the same period last year.
Although Sysco’s operating expenses climbed by 20.4% year over year in the past 39 weeks, its other expenses declined by 52%, and that helped deliver profit growth.
“I am very pleased with our third-quarter performance.
“We saw solid operating income growth, driven by strong local case growth and effective expense management. We are making continued progress on our strategic multiyear initiatives, which provide a platform for ongoing value creation for our customers, associates and shareholders. Going forward, we remain focused on growing our business in a disciplined, profitable manner and are confident in our ability to achieve our three-year plan financial objectives.” – Bill DeLaney, Sysco’s CEO
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Valuations
The company trades at far richer premiums compared to its peers. According to GuruFocus data, Sysco had a trailing price-earnings (P/E) ratio of 26.3 times vs. the industry median of 20.5 times, a price-book (P/B) ratio of 11.5 times vs. the industry median of 1.8 times and a price-sales (P/S) ratio of 0.51 times vs. the industry median of 0.49 times.
Sysco had a trailing dividend yield of 2.56% with a 67% payout ratio.
Average 2017 sales and earnings-per-share expectations indicated forward multiples of 0.48 times and 20.2 times.
Total returns
Sysco has underperformed the broader Standard & Poor's 500 index so far this year generating total losses of 8.65% compared to the index’s 9.98% (Morningstar). Nonetheless, the company outperformed the index in the past three years with 12.6% total returns (annualized) vs. the index’s 9.8%.
Sysco
According to filings, Sysco was founded in 1969. Acting through its subsidiaries and divisions, Sysco is the largest North American distributor of food and related products primarily to the foodservice or food-away-from-home industry.
Prior to Sysco’s Brakes acquisition in 2016, the company provided products and related services to approximately 425,000 customers, including restaurants, health care and educational facilities, lodging establishments and other foodservice customers.
In February 2016, Sysco entered into a purchase agreement to acquire Cucina Lux Investments –Â the parent holding company of the Brakes Group – for approximately 2.3 billion British pounds ($2.977 billion).
According to filings, the Brakes Group is a leading European foodservice business by revenue, supplying fresh, refrigerated and frozen food products as well as nonfood products and supplies to more than 50,000 foodservice customers ranging from large customers, including leisure, pub, restaurant, hotel and contract catering groups, to smaller customers, including independent restaurants, hotels, fast food outlets, schools and hospitals.
Further, the Brakes Group has leading market positions in the U.K., France and Sweden, in addition to a presence in Ireland, Belgium, Spain and Luxembourg.
Sysco provides food and related products to the foodservice or food-away-from-home industry.
In 2016, Sysco generated 89% of its revenue in the U.S., 8.9% in Canada and the rest in other countries.
Sysco has had two segments: Broadline and SYGMA. As of the first quarter Sysco changed its segment reporting in three: U.S. Foodservice Operations, International Foodservice Operations, SYGMA and Other.
U.S. Foodservice Operations
The division primarily includes U.S. broadline operations, custom-cut meat companies, FreshPoint (specialty produce companies) and European Imports (a specialty import company).
In the recent 39 weeks of operations, revenue in the U.S. grew 0.8% year over year to $27.8 billion or 68% of total unadjusted sales. Sysco reported an operating margin of 7.6% (most profitable in Sysco’s segments) compared to 7.1% in the same period last year.
International Foodservice Operations
This division primarily includes broadline operations in Canada and Europe (including the Brakes Group, which was acquired in fiscal 2017), Bahamas, Mexico, Costa Rica and Panama as well as a company that distributes to international customers.
In the past three quarters, revenue in the segment doubled year over year to $7.88 billion or 19% of total unadjusted sales, and Sysco had an operating margin of 2.3% compared to 3.2% in the same period last year.
SYGMA
SYGMA is Sysco’s customized distribution subsidiary.
SYGMA’s revenue growth in the recent three quarters rose by 2.5% to $4.56 billion or 11% of total unadjusted company sales. The division also delivered an operating margin of 0.3% compared to 0.5% in the same period last year.
Other
This division primarily is responsible for Sysco’s hotel supply operations and Sysco Ventures platform, which includes the company’s suite of technology solutions that help support the business needs of its customers.
Revenue in the other fell by 7.6% to $707.1 million (2% of total unadjusted sales) and an operating margin of 2.5% compared to 3.1% in the same period last year.
Sales and profits
In the past three years, Sysco had an average revenue growth of 4.28%, profit decline average of 1.46% and profit margin average of 1.77% (Morningstar).
Cash, debt and book value
As of April, Sysco had $855 million in cash and cash equivalents and $8.6 billion in debt with a debt-equity ratio of 3.7 times vs. 1.1 times in the same period last year. The company’s debt climbed by $4.2 billion while shareholder equity fell by $1.64 billion in the same period.
Of Sysco’s $17.92 billion assets 27%Â were blue sky elements, having included goodwill and intangible assets. The company recorded a 41% decline in book value to $2.33 billion.
Cash flow
In the recent three quarters, Sysco’s cash flow from operations rose by 3.6% to $1 billion year over year. In addition to higher profits in the period among others, Sysco also recorded higher cash flow from its payables and other long-term liabilities.
Capital expenditures were $413.8 million leaving Sysco with $611 million in free cash flow compared to $628 million in the same period last year. The company also provided 3.4 times its free cash flow, or $2.1 billion, in dividends and share repurchases.
According to filings, Sysco repurchased 6.4 million of its shares at an average price of $53.2 per share –Â 6.6% higher than the share price of $49.92 (at the time of writing) in the past 39 weeks. In fiscal 2016, the company spent $1.9 billion repurchasing 44.7 million shares or in estimate $42.49 per share.
Meanwhile, Sysco provided 120% of its free cash flow on average in shareholder payouts including dividends and share repurchases in the past three fiscal years.
In the recent three quarters, Sysco took in $1.14 billion in borrowings net any repayments.
Conclusion
Sysco delivered strong results in the recent nine months of operations. This was made possible even though its U.S. division grew merely a percentage point year over year while international operations grew 100% or double the previous year secondary to a prudent acquisition of the Brakes Group.
As a result of this acquisition, Sysco carried a leveraged balance sheet in the recent period. The company also had more than a quarter of blue sky elements in its assets while book value decline year over year. Nonetheless, Sysco has remained overly generous to its shareholders throughout this process and in the past years by providing payouts, such as dividends and share repurchases.
Fourteen analysts have an average price target of $55.79 per share –Â 11.8% higher than today’s share price of $49.92 (at the time of writing). Applying three-year revenue growth and P/S multiple averages followed by a 20% margin indicated a value of $22.4 billion or $41.9 per share.
In summary, Sysco is a buy with about $53 per share target price.
Disclosure: I do not have shares in any of the companies mentioned.
