Sysco Corporation, the food wholesaler–not the manufacturer of computer routers, is another solid buy candidate. SYY is a high quality growth company.
SYY made the Forbes’ 2004 list of the 26 best managed companies in America. Value Line gives SYY its highest ratings for both financial Strength (A++) and earnings persistence (100). SYY is a large company with annual sales of more then $8 billion.
The first call consensus EPS five-year growth rate is 15%. The SSG above uses a more conservative EPS growth rate of 11.9%. Using this lower rate, projected average return over five years is 11.3% and the total return (assuming sale at a high PE) is 14.5%. The upside downside ratio is 3.7.
This would be a particularly good stock for our portfolio since it is in an industry that we don’t hold.
Business Summary: Sysco Corporation is the leading United States distributor of food and related products to the foodservice industry. It has approximately 420,000 customers in the United States and Canada. Serves restaurants, educational institutions, hospitals, nursing homes, hotels, and motels. Has 134 distribution facilities and self-service centers in the U.S.; 28 in Canada. Acquired Staley Continental 8/88. 2003 depreciation rate: 7.6%. Has 47,400 employees, 15,440 shareholders of record. Officers & Directors own less than 1.0% of stock (9/03 proxy). Chairman & CEO: Richard J. Schnieders. President & COO: Thomas E. Lankford. Incorporated: DE. Address: 1390 Enclave Parkway, Houston, TX 77077-2099. Telephone: 281-584-1390. Internet: www.sysco.com.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HIGHLIGHTS (Excerpt from Form 10-K filed on 16-Sep-2004)
Sales increased 12.2% in fiscal 2004 over fiscal 2003. Fiscal 2004 included 53 weeks which represented an additional week over the 52 weeks in fiscal 2003. This additional week represented an estimated 2.2% of the sales increase in fiscal 2004. Gross margins as a percent of sales for fiscal 2004 decreased from the prior year due to the impact of product cost increases and changes in customer mix, segment mix and product mix. Operating expenses as a percent of sales for fiscal 2004 decreased from the prior year due to operating efficiencies and operating costs increasing at lower rates than the sales price increases driven by product cost increases. Operating expenses were negatively impacted by increased net pension costs and expenses incurred in connection with the National Supply Chain project and were favorably impacted by gains recorded related to the cash surrender value of life insurance assets. Primarily as a result of these factors, net earnings increased 16.6% in fiscal 2004 over fiscal 2003. The earnings increases in fiscal 2004 over fiscal 2003 also include the impact of the additional week in fiscal 2004.
The impact on our customers of a prolonged period of rising product costs, internally estimated at 6.3% for the fiscal year and 8.0% for the fourth quarter of fiscal 2004, has contributed to a softer foodservice market. Management believes that the softness in the foodservice market together with general economic conditions contributed to a slowing of sales growth for the company in the latter half of the fourth quarter of fiscal 2004 which is continuing in the first quarter of fiscal 2005. The company has renewed its focus on expense controls in fiscal 2005, including managing labor costs and productivity and ongoing benchmarking and sharing of best practices at the operating companies.
OVERVIEW
SYSCO distributes food and related products to the foodservice industry, including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. SYSCO’s operations are located throughout the United States and Canada and include broadline companies, specialty produce companies, custom-cut meat operations, Asian cuisine foodservice, hotel supply operations, SYGMA, the company’s chain restaurant distribution subsidiary, and a company that distributes to internationally located chain restaurants.
The company estimates that it serves more than 14% of an approximately $207 billion annual foodservice market that includes the North American foodservice, non-food and hotel amenity, furniture and textile markets. The foodservice, or food-prepared-away-from-home, market represents approximately one-half of the total food purchases made at the consumer level. This share has grown from about 37% in 1972, since food purchases in the foodservice industry have grown more rapidly than food purchases in the retail grocery industry over most of that time period. Factors influencing this trend, and therefore SYSCO’s growth, include increases in dual-worker and single-parent families; busier lifestyles; the general aging of the population; growing affluence; and the increasing demand for the variety, convenience and entertainment afforded by the proliferation of restaurants and other foodservice operations. Industry statisticians and demographers expect most of these general trends to continue, although they may not continue at the same pace.
General economic conditions and consumer confidence can have an effect on the frequency and amount spent by consumers for food prepared away from home and therefore on SYSCO. However, we have consistently grown at a faster rate than the overall industry and have grown our market share in this fragmented industry.
The company intends to continue to expand its market share and grow earnings through strategies which include:
The company’s National Supply Chain project is intended to optimize the supply chain activities for certain products from SYSCO’s operating companies in each respective region and as a result, reduce inventory and operating costs, working capital requirements and future facility expansion needs at SYSCO’s operating companies while providing greater value to our suppliers and customers.
The company expects to build from five to ten regional distribution centers over a period of ten years. The first regional distribution center in the Northeast is expected to be operational during the third quarter of fiscal 2005.