The Wal-Mart of Food Service
Sysco, already hugely profitable, should thrive in an economic downturn.
At first glance, Sysco Corp. would seem like a stock to avoid in a weakening economy. The largest distributor in the food-away-from-home industry books nearly all of its sales in North America, currently a weak link in the global economy. Food inflation zoomed from zero at the start of 2007 to 6% during the year. High gasoline prices are squeezing restaurants, from which Sysco derives 64% of sales.
But if you look deeper, you'll find a company with enormous strengths, built to weather hard times -- and even flourish in them. That's how Houston-based Sysco has boosted sales and dividends every year since it went public in 1970. "We tend to do better than our competition in tough times," says chairman and chief executive Richard Schnieders. He aspires to boost Sysco's market-leading share from about 15% to 25% over time.
The away-from-home food business in the U.S. and Canada is a $225-billion industry at wholesale. Sysco provides its customers with everything from food (fresh, frozen and canned) to paper products to kitchen equipment. Its roughly 400,000 clients include restaurants (most of them independent local operators), hotels, hospitals, schools and company cafeterias -- pretty much any place that prepares food. Major customers include Wendy's and Whole Foods.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A glamorous business it isn't. But Sysco, built through more than 140 acquisitions, can turn a nice profit through scale, efficiency and a wide network of distribution centers across the U.S. and Canada. In the fiscal year that ended in June 2007, it earned $1 billion after taxes, or $1.60 per share, on sales of $35 billion. Revenues this year should approach $38 billion.
A 3% net margin doesn't sound high, but that doesn't tell the profitability story. Sysco consistently generates a return on capital in excess of 20%, while its cost of capital is less than 10%. A business with those kinds of numbers creates enormous economic value for shareholders, year in and year out. That is reflected in Sysco's bountiful free cash flow (cash available after necessary capital spending) and impressive record of boosting dividends, which have compounded by 17% annualized over the past ten years. The company also achieves an unusually high return on equity (a measure of profitability) of more than 30%.
How does Schnieders intend to keep boosting profits and grabbing market share? First, Sysco is so indispensable to its customers that it has little trouble passing on increases in food prices to them. Schnieders says the company is drawing closer to clients through joint "business reviews," which typically include advice on menus and operating details, such as inventory control.
Sysco is also strengthening its already potent, industry-leading network of 177 distribution centers -- more than twice the number of its largest competitor, privately held US Foodservice. It is building six regional redistribution centers that Schnieders says will dramatically improve efficiency in the supply chain. The concept, he says, is akin to Wal-Mart's logistics system and is unlikely to be replicated by Sysco's rivals. "Our network is so much bigger and more powerful than the competition, which doesn't have the systems to do it," he says.
Sysco will likely gain market share in a recession, but the stock is selling at recessionary prices. At $29 in mid February, Sysco (symbol SYY) traded at 16 times estimated 2008 earnings. That compares with an average price-earnings ratio of 23 over the past five years, says analyst Mark Churchill, of Piper Jaffray, and it's the lowest the P/E has been in the past decade. Plus, you get paid a 3% yield while you wait for the stock to appreciate.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Andrew Tanzer is an editorial consultant and investment writer. After working as a journalist for 25 years at magazines that included Forbes and Kiplinger’s Personal Finance, he served as a senior research analyst and investment writer at a leading New York-based financial advisor. Andrew currently writes for several large hedge and mutual funds, private wealth advisors, and a major bank. He earned a BA in East Asian Studies from Wesleyan University, an MS in Journalism from the Columbia Graduate School of Journalism, and holds both CFA and CFP® designations.
-
Thanksgiving 2024: How Grocery Taxes Impact Your Holiday Food Budget
Food Prices Some families are navigating high food prices influencing what’s on the table this Thanksgiving.
By Kelley R. Taylor Published
-
9 Year-End Money Moves to Make Now
Boost your retirement savings, lower your taxes and get the most out of your health insurance.
By Sandra Block Published
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
By Dan Burrows Published
-
Fed Goes Big With First Rate Cut: What the Experts Are Saying
Federal Reserve A slowing labor market prompted the Fed to start with a jumbo-sized reduction to borrowing costs.
By Dan Burrows Published
-
Stock Market Today: Stocks Retreat Ahead of Nvidia Earnings
Markets lost ground on light volume Wednesday as traders keyed on AI bellwether Nvidia earnings after the close.
By Dan Burrows Published
-
Stock Market Today: Stocks Edge Higher With Nvidia Earnings in Focus
Nvidia stock gained ground ahead of tomorrow's after-the-close earnings event, while Super Micro Computer got hit by a short seller report.
By Karee Venema Published
-
Stock Market Today: Dow Hits New Record Closing High
The Nasdaq Composite and S&P 500 finished in the red as semiconductor stocks struggled.
By Karee Venema Published
-
Stock Market Today: Stocks Pop After Powell's Jackson Hole Speech
Fed Chair Powell's Jackson Hole speech struck a dovish tone which sent stocks soaring Friday.
By Karee Venema Published
-
Stock Market Today: Stocks Drop Ahead of Powell's Jackson Hole Speech
Sentiment turned cautious ahead of Fed Chair Powell's highly anticipated speech Friday at the Jackson Hole Economic Symposium.
By Karee Venema Published
-
Stock Market Today: Stocks Rise After Jobs Data Lifts Rate-Cut Odds
Preliminary data from the Bureau of Labor Statistics shows job growth was lower than previously estimated.
By Karee Venema Published