Company Analysis - SYSCO (SYY)

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Firm overview

Sysco Corporation, acting through its subsidiaries and divisions, is the largest North American distributor of food and related products primarily to the foodservice or food-away-from-home industry.  Sysco provides products and related services to approximately 400,000 customers, including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers.  (Source: Form 10-K)

Investment rationale

Investment rationale includes based on a P/E basis, the firm appears undervalued given forecasted growth, business risk, and financial risk.  The firm should continue to benefit from an improving economy, as consumer desires to eat out should increase.  The firm has a strong dividend that appears, for the time being, to be sustainable.  The current dividend provides downside protection, while providing a steady growing stream of income to income oriented investors.  The firm generates cash from operations and has a strong balance sheet.  Although margins are low (but very consistent), the firm appears to have a durable competitive advantage.

Highlights

• Although margins are not strong, margins are consistent.  Firm has effective cost management and is working on improving efficiencies as part of the firm's growth strategy.
• The firm has a strong liquidity position; the current ratio is above 1.  Firm has positive operating cash flow and free cash flow.
• The firm has a strong balance sheet.  Debt-to-capital range is appropriate.  Debt coverage from operating cash flow is adequate (3 years of debt for one year of operating cash flow).
• The firm spends approximately 50% of earnings on CAPEX.  This most likely represents a durable competitive advantage for the firm.
• Return on common equity is approximately 30%; there were no large fluctuations.  ROCE over 30% indicates durable competitive advantage.
• Debt-to-common equity adjusted for treasury shares is below 80%.  Any ratio below 80% typically indicates a durable competitive advantage.
• The firm grew dividends at a higher rate than earnings growth.  Using net income, the dividend payout ratio is approximately 50%.  A payout ratio above 50% indicates the dividend may be unsustainable.  If firm grows dividends with income growth, the dividend should be safe.  Yield is in the range of 3.6%-3.7%; good yield for income investors.

Valuation

Using the FCFE approach, the firm's intrinsic value was calculated at $23.74.  This price assumes 7.5% growth rate for the first ten years and a 3% terminal growth rate.  The risk-adjusted discount rate is 11.48% (please see "Valuation assumptions).  Currently, the risk-adjusted margin of safety is 14.42%; using this margin of safety, the purchase price should be $22.62.  The stock closed at $28.70 on April 6, 2010.  Based on the discounted future cash flows of this firm, the stock is overvalued at $28.70.  Any big sell-off could create a buying opportunity.

Based on a similar methodology used to determine the discount rate and margin of safety, the "Buy P/E" is estimated to be 18.19, while the "Sell P/E" is estimated to be 23.13.  Based on 2011 EPS, the forward P/E is 14.9, or lower than the "Buy P/E."  Based on an earnings multiple basis, the firm is undervalued.

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This information is for educational purposes only, and the opinions expressed do not constitute a recommendation to buy or sell. Author may have a position in the companies discussed, subject to change at any time. Information on this website obtained from reliable sources, but there is no guarantee of accuracy. Please consult your financial advisor before making investment decisions. Past performance is not indicative of future success.