INVESTMENT THESIS
Sysco Corp. (NYSE: SYY), whose restaurant supply business (about 65% of revenues) has been hurt by restaurant closures during the pandemic; however, the company is working to offset the drop in restaurant revenues by lowering costs and focusing on sales to grocers, who are seeing strong sales. Although restaurant closings have led investors to focus on the liquidity of foodservice distributors, we believe that Sysco has sufficient liquidity and access to credit to survive the current downturn.
If a vaccine is distributed sooner than we anticipate, we would consider an upgrade. We believe that the company’s long-term fundamentals remain strong and we are maintaining our five-year BUY rating.
RECENT DEVELOPMENTS
On November 3, Sysco reported fiscal 1Q21 sales of $11.8 billion, down 23% from the prior year, reflecting a 26% decrease in the U.S. Foodservice revenue. The gross margin fell 39 basis points to 18.9%. The consensus estimate had called for a gross margin of 18.2%. Interest expense rose to $147 million from $83 million. The adjusted operating margin was 3.1%. The consensus estimate had called for an operating margin of 2.7%. First-quarter adjusted operating expenses fell 15.7% to $1.9 billion. The diluted share count fell to just below 511 million from 519 million a year earlier.
The company reported 1Q GAAP earnings of $0.42 per share, down from earnings of $0.87 per share in 1Q20.
In July 2016, the company paid $3.1 billion and assumed $2.3 billion in debt to acquire Brakes Group, a European food distributor. The acquisition has significantly expanded the company’s customer base in Europe.
EARNINGS & GROWTH ANALYSIS
Sysco Corp. reports financial information for two business segments: U.S. Foodservice Operations; and International Foodservice Operations. In the U.S. Foodservice segment, 1Q sales fell 26% to $7.9 billion; the gross profit decreased 25%, and the gross margin rose 7 basis points to 20.2%. Local case volume in the U.S. Broadline business fell 22%, primarily due to lower organic revenue. In the International Foodservice segment, sales were down 26% from the prior year and gross profit fell 26%. djusted operating income was $19 million.
We expect revenue to fall 3% in FY21, to $51.4 billion. We also expect a barely positive adjusted margin, with a year-over-year decline of 300 basis points. Based on less favorable operating leverage, we are maintaining our EPS estimates of $2.10 for FY21 and $3.10 for FY22.
FINANCIAL STRENGTH & DIVIDEND
State-mandated restaurant closings are causing investors to focus on the liquidity of foodservice distributors. To shore up its balance sheet, on March 20, Sysco drew down a $1.5 billion revolving credit facility, raising cash on hand to $2 billion. In addition, Sysco is working with its bankers to raise additional funds to improve liquidity.
MANAGEMENT & RISKS
On January 13, 2020, Kevin P. Hourican was named CEO effective February 1. He replaces Thomas L. Bene, who stepped down on January 31 after two years as CEO. Mr. Bene will remain as an executive adviser until March 1, 2020.
Competition is fierce in the $279 billion U.S. food distribution industry. Sysco estimates its market share at approximately 16%. here are more than 15,000 foodservice distribution companies in the U.S., however, and Sysco must compete constantly with regard to price, volume, and food quality.
COMPANY DESCRIPTION
The company’s major customers include restaurant chains as well as schools and colleges, hotels, hospitals, and other foodservice outlets. The company distributes more than 400,000 products, including approximately 40,000 Sysco-branded items. Sysco’s private-label products range from seafood and ethnic foods to meat, delicatessen items and condiments.
VALUATION
Trading at 23.9-times our FY22 (when we expect full recovery) earnings estimate, SYY shares appear fairly valued and we think further restrictions on restaurants, are likely to weigh on near-term results. Were a vaccine to be distributed sooner than we anticipate and restrictions ease, we would consider an upgrade. O n November 17, HOLD-rated SYY closed at $74.23, down 0.74.
Source: Argus
