Is Sysco Heading in the Right Direction?

With shares of Sysco Corporation (NYSE:SYY) trading at around $31.22, is SYY an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Sysco is in the process of a heavy turnaround, which makes the potential for the company more difficult to determine. Let’s start with the basics. Q2 profit was down 11.6 percent, which related to turnaround costs. It should also be noted Sysco has been dealing with weaker sales and higher food costs for several years. However, this pertains to the entire industry. Sysco has fought back by cutting costs, reducing its employee count, and closing facilities. So far, those actions have had a small impact.

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Getting back to Q2, EPS came in at $0.38 versus $0.43 for the same quarter last year. Revenue came in at $10.8 billion, which beat the average expectation of $10.7 billion. This was also a 5.6 percent increase year-over-year as well as the highest Q2 revenue on record for the company. The primary reason for this record revenue was sales through acquisitions. This is great news, but expenses were up 8.2 percent to $116 million. The biggest expense was $45 million in restructuring costs. Another large expense was a $17 million rise in payroll expenses.

Let’s look at some important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Sysco is normal, but the balance sheet is negative.   

Debt-To-Equity

Cash

Long-Term Debt

SYY

0.62

$548.42 Million

$3.02 Billion

NAFC

1.18

$1.20 Million

$388.88 Million

UNFI

0.15

$8.94 Million

$150.44 Million

 

T = Technicals on the Stock Chart Are Mixed   

The competitors listed below are smaller than Sysco, but it’s interesting to note that United Natural Foods (NASDAQ:UNFI) has outperformed Sysco by a wide margin over the past three years. Both companies currently yield 3.50 percent. Nash Finch Co. (NASDAQ:NAFC) has underperformed both companies and offers no yield.

1 Month

Year-To-Date

1 Year

3 Year

SYY

-2.04%

-0.57%

4.62%

27.25%

NAFC

-2.01%

-1.60%

-26.12%

-33.14%

UNFI

-0.65%

0.39%

13.96%

111.30%

 

At $31.22, Sysco is trading below its 50-day SMA, at its 100-day SMA, and above its 200-day SMA.

50-Day SMA

31.57

100-Day SMA

31.22

200-Day SMA

30.09

 

E = Earnings Had Been Unimpressive         

In an environment where most companies have been improving earnings consistently since 2009, Sysco has seen decreasing earnings since 2010. A lot of this has to do with a weak industry, but as an investor, industry trends should always be strongly considered. The good news is that revenue has improved on an annual basis since 2009.

2008

2009

2010

2011

2012

Revenue ($)in billions

37.52

36.85

37.24

39.32

42.38

Diluted EPS ($)

1.81

1.77

1.99

1.96

1.90

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

10.59

10.24

10.50

11.05

11.09

Diluted EPS ($)

0.51

0.43

0.44

0.52

0.49

 

T = Trends Do Not Support the Industry

At the moment, the industry is suffering from weak sales and rising food costs. The former is likely to continue, or possibly even worsen. The latter situation is likely to improve. It is now widely believed that we will soon be moving toward de-leveraging in regards to our county’s tremendous debts. If that happens and stimulus halts, then inflationary trends will reverse themselves and possibly even lead to deflation. If this occurs, then demand will sour, which is the bad news. The good news is that prices will come down across the board.

Conclusion

Sysco is a solid company that is dealing with industry weakness at the moment. If you’re looking for a short-term trade, then you could be looking for trouble. If you’re looking for a long-term investment, then you do a lot worse. Sysco has essentially gone nowhere over the past decade, but collecting a 3.50 percent yield while the stock goes nowhere isn’t such a bad deal. There is little doubt that Sysco will once again be a great stock to own, but that time isn’t in the near future. Therefore, Sysco is a WAIT AND SEE.

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