Sysco

Sysco (SYY) is a company we really like now, and for the long run. We find the stock very compelling at its current price ($22). It is the dominant food distributor to the restaurant industry with sales over $37 Billion. It also sells to customers in the healthcare, educational and lodging industries.

Sysco also has a very large private label business (with over $12 Billion in sales) that makes it one of the largest food companies. In tough economic times, restaurants may find that shifting to the Sysco brand makes a great deal of economic sense.

Sysco’s size gives it a cost advantage over its competitors that can be used to benefit its customers and its shareholders. The company has been embarking on a huge redistribution plan that should allow it to lower costs, improve productivity and reduce inventory. Sysco is also focused on doing more centralized purchasing (in the past it let its individual operating companies purchase items separately). And Sysco is focused on making its transportation system even more efficient. Sysco has the largest private fleet of trucks in North America. So far this fiscal year, it has been able to reduce its miles driven by 10 million. Given the cost of fuel, that translates into real savings. These initiatives will lead to a significant improvement in margins at Sysco.

Of course, during tough economic times, people may eat out less and restaurants will close at a more rapid pace. These are certainly factors that could hurt sales. But we think it could benefit Sysco, as restaurant owners consolidate their suppliers. Sysco also has a Business Review program, where it works closely with its customers to help them operate more effectively. This program has led to Sysco becoming a more valued supplier and increasing its sales.

While the company has about $2B in debt (compared to $300 million in cash), they issued $500m in new notes this month, so liquidity is not a concern. The company indicated that it has no immediate needs for the funds, but was taking advantage of attractive rates in the marketplace. Sysco carries an AA- rating from S&P. Only $7.5Million of Sysco’s debt is due in the next 12 months.

The company is committed to returning money to its shareholders. Sysco is a Dividend Aristocrat, meaning it has increased its dividend annually for at least 25 years. At the end of last year, it raised its dividend by 9% and the yield is now 4.4%. The dividend payout ratio is 53%. Sysco has also repurchased at least $500 million in stock in each of the last 5 years and has reduced its shares outstanding by over 50 million shares during that period.

Bottom line, Sysco is expected to earn around $1.80 in FY2009 ending in June. Assuming they earn a similar amount the following year, Sysco is trading at just over 12x forward earnings. This is a pretty reasonable price to pay for such a dominant company. The valuation coupled with a 4.4% dividend yield makes this a very interesting stock.


(Disclosure: Harvest Financial Partners owns Sysco in its client portfolios. The author owns Sysco in his personal portfolio. Positions may change at any time.)