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TheDumbMoney (62.60)

Sysco Corporation Should Not Have Five Stars on CAPS

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April 23, 2012 – Comments (13) | RELATED TICKERS: SYY

As best I can tell, Sysco corporation has outperformed the S&P only two years in the last six (2006 and 2008), including this year so far, and is cumulatively massively underperforming both the S&P price index and the S&P total return index.  Yet it continues to be a recommendation of many smart people, and in fact has a 5-star rating here on CAPS.  Morningstar gives it a 4-star buy rating.  And not only has it not outperformed in the past, my (NON-expert) analysis of it and of its history of cash flows and likelihood of future cash flows makes it seem extremely unlikely either that it is remotely undervalued even now, or that it can outperform the S&P price or total return index going forward.  That seems true even though it is cheaper than it has been for years, as its P/E ratio has continued to contract in tandom with its slowing prospects.  In Peter Lynch terms it is a "sluggish grower," not even a "stalwart."  It is the epitome of a stock you buy only for the most conservative of reasons.  This post is complete in its conclusions, but if you like, you can see here for my longer analysis and cash flow spreadsheet.

13 Comments – Post Your Own

#1) On April 23, 2012 at 2:07 PM, tekennedy (75.54) wrote:

Hello,

Although I appreciate your somewhat contrarian view on the company (and in general) I have to disagree somewhat on your analysis due to short-term effects on capex and margins.  Quite simply, the company is currently investing heavily in new IT infrastructure which is depressing both margins and free cash flow.  These effects should be over after 2013 when FCF will "pop" back to normal levels, then grow at its normal, slow-and-steady growth rate.  Also I believe historic comparisons and viewing stock performance over the last decade is less representative due to the high valuation it had prior to the current recession and the fairly reasonable price now.  Do I believe this will be a "multi-bagger"? No.  But it sure beats bonds and I think it has a fair chance of beating the S&P 500 over the next decade.

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#2) On April 23, 2012 at 3:01 PM, TheDumbMoney (62.60) wrote:

Hi tekennedy,

It's possible and as I acknowledge even more explicitly in the main post on my blog, Sysco is cheaper than it has been for years, if not for a decade or more.

But the numbers just do not seem to me to cleearly back your story up, at least through 6/2011.  At the very least there is ambiguity. 

The numbers show abnorally low investments in property in 2008 and 2009, a return to normalcy in 2010, and possibly a slight divergence above norm in 2011 fiscal year, buttressed by the fact that the TTM number is even higher.

http://financials.morningstar.com/cash-flow/cf.html?t=SYY&region=USA&culture=en-us

While you can tell a story about new IT infrastructure, you can also tell a story about how Sysco is just making up for spending it deferred previously during the crisis in 2008 and 2009, because that deferral has hurt it, and that the spending will just get it back to its pre-2008 norm/trend, etc. 

Now maybe those are one and the same thing, I have no special insight, nor have I reviewed annual reports, etc., in detail to see if there is some new visionary strategy.

Best wishes,

 www.dumbmoney.tumblr.com

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#3) On April 23, 2012 at 3:10 PM, materialsman92 (36.40) wrote:

^ hate their products piece of crap

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#4) On April 23, 2012 at 3:33 PM, amassafortune (29.65) wrote:

 "sure beats bonds" is important. The 3.7% dividend, $1.08 per share, is backed by $1.95 of earnings per share = sustainable.

Sysco's primary focus in food supply is somewhat recession-resistant. 

The 14.69 P/E is not a great bargain, but neither is it anything like Facebook's will be three weeks from now, probably somewhere north of 50. 

Return on equity is excellent at 26.44%. ROE often gets ignored when investors look at growth. Young, fast-growing companies may have so much debt that most of their great results go to banks or bondholders, not shareholders.

I also like the current ratio for a quick balance sheet check of how easily a company can cover the bills. Anything above 1.0 is pretty solid. Sysco's is 1.73. 

There are a couple possible weak spots. Sysco's non-food business that supplies the hospitality industry could weaken in a recession. With all the food prep shows and kitchen remodelling these days, one would think restaurant volume had peaked. Such is not the case, but in a severe downturn, eating out is an area where people could cut back, though many would probably give up paying the mortgage first.

With Apple, Chipotle, and social media stocks wavering after the market's huge rise since October, 2011, I see Sysco as a pretty safe place to be. I agree 4 stars may be more defensible as a CAPS ranking, but Sysco is a solid choice for these risky times. 

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#5) On April 23, 2012 at 5:22 PM, TheDumbMoney2 (99.03) wrote:

Hi amassafortune, I actually note almost all of that in the post to which my post above links, see here: http://dumbmoney.tumblr.com/post/21538284397/sysco-corporation-the-emporor-has-no-clothes

The information in the first four paragraphs of your comment is all available in about one minute off of Morningstar and Yahoo Finance, etc..  I get all of that and I am aware of it.  That stuff is why, as I note, it's rated 5-stars on Caps, etc. 

My point is that if you look at the discounted free cash flow, and at the longer and larger picture, it possibly is not worth what it is trading at today.

I agree Sysco is an excellent defensive position if you interested only in short term outperformance during a down market.  I just do not see how it will outperform over the longer term.

Thanks for commenting,

www.dumbmoney.tumblr.com

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#6) On April 23, 2012 at 6:08 PM, tekennedy (75.54) wrote:

Hello again,

The last time I'd done extensive due dilligence was in regards to their investors day at the end of 2010 which can be found here: http://www.sysco.com/investor/events.html

Page 87 of the pdf details the expense breakdown which shows an extra $250 and $280 in added cost for 2010 and 2011.  The rest of the cash flow variations seem to be a result of a reversal of the deferred income taxes and other working capital, which seems roughly in line as a percentage of revenue. 

I also wouldn't say that 2008 and 2009 had significantly low capex as they remained above depreciation through those years and have reasonably tracked sales over time. 

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#7) On April 23, 2012 at 6:30 PM, TheDumbMoney (62.60) wrote:

Yeah, it remained above depreciation, but it was at least $100 million below trend (before and after) in each of those two years.  In 2009 it was arguably closer to $150 million below trend.

If you compute free cash flow by Joel Greenblatt's alternative method, which is just Net Income minus Depreciation, then FCF has been even more stagnant at SYY.

I am glad you commented, and I'll keep an eye on SYY to see how its implementation of its strategy goes.  I am not convinced yet that it represents anything more than the unwinding of low 2008/2009 capex, but I appreciate that PDF you sent me, and I did find it on the website.  Note though that that PDF page does not show the abnormally low (relative to trend, not depreciation) capex from 2008 and 2009 though.

I'll have my eye on it.  I think even if the company meets its goals as stated, it will only just meet by lower target growth rate from my FCF spreadsheet, which would make it just about fairly but not under-valued, with no margin of safety.  And that still assumes it meets its goals and shows more growth than it has shown in ten years.

Just one dude's view!

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#8) On April 23, 2012 at 6:43 PM, awallejr (78.92) wrote:

. . . and that the spending will just get it back to its pre-2008 norm/trend, etc.

I think there are plenty of companies that wish they were even close to doing this.  I think Citibank would need to be selling in the 300s.

You could have bought SYY at around $20 in 2009, and with accumulated dividends at current price you probably got near a 14% annual return.  Not too shabby.  Also this stock has continually raised its dividend even during the Great Recession when many were cutting theirs.

The point of the stock is more as an ancor to a portfolio. I think all portfolios should have several of these in various industries just to hold a portfolio steady to some degree.  A low beta, steady company that pays a decent growing dividend is worth a look.

I personally think the real years that matter now when analyzing stocks are the last 5, because that is when it all changed.  Volatility is now king.  With exceptions, most equities seem to rise and fall together on outside news.  We had a market lose 900 points in a day and we had a market crash of 1000 points in 15 minutes. 

But stocks like SYY tend to hold their value.  I think it got a little ahead of itself but worth a look if it drops a few more points.

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#9) On April 23, 2012 at 7:16 PM, TheDumbMoney (62.60) wrote:

See also this chart:

http://ycharts.com/companies/SYY/price#series=type:company,id:SYY,calc:price,,id:SYY,type:company,calc:total_return_price,,id:^SPXTR,type:index,calc:&zoom=10&startDate=&endDate=&format=indexed&recessions=false

On a total return basis, including reinvestment of dividends, SYY has underperformed the total return SYP index (assumes reinvestment of dividends in the index) by more than 25% in the past decade, since April 2002.

If you bought at the lows in October 2002 it has underperformed by 70%, see here:

http://ycharts.com/companies/SYY/price#series=type:company,id:SYY,calc:price,,id:SYY,type:company,calc:total_return_price,,id:^SPXTR,type:index,calc:&zoom=&startDate=10/2/2002&endDate=4/23/2012&format=indexed&recessions=false

Throughout the past five years, during the whole financial crisis and recovery, it has only outperformed by around 2.5% percent:

http://ycharts.com/companies/SYY/price#series=type:company,id:SYY,calc:price,,id:SYY,type:company,calc:total_return_price,,id:^SPXTR,type:index,calc:&zoom=&startDate=10/2/2002&endDate=4/23/2012&format=indexed&recessions=false

All of that outperformance and then some came in 2008.  In every year since then it has underperformed. 

(These numbers are as of the day of this post, those charts are live-updating.)

I totally get that it's a portfolio anchor.  I'm emphatically not saying "sell". 

I'm just saying that to the extent that CAPS is about outperforming the S&P, this is not the best place to look.  I think the CAPS rating either must reflect the fact that a lot of people think the market is going to tank again in the short-term, or misperception of this company as a stronger grower than it is in the long-term.

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#10) On April 23, 2012 at 7:31 PM, TheDumbMoney (62.60) wrote:

Really enjoy the debate, folks. 

If you post about a stock like Sysco over at Stocktwits, do you know what you hear?

Crickets.  That's what.

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#11) On April 23, 2012 at 7:35 PM, awallejr (78.92) wrote:

You are using the past decade, I am not since I think the rules of investing have changed since the crash.  To be honest anytime there is a down day of at least 100 points I am willing to wager that most are worried about another crash.  The retail investor is long gone.

I green thumb things I think will go up over time.  I don't consider if whether it will outperform the S&P, so to that extent I am not playing by the right rules.  Doesn't mean, however, that the pick is a bad one.

I actually did eye buying it for $20 back in 2009, but I wound up buying MMLP instead.

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#12) On April 23, 2012 at 9:07 PM, rd80 (97.30) wrote:

I haven't looked at Sysco in a while.  Used to own it - swapped for MKC about a year ago.

FWIW, I had an CAPS pick on SYY from 6/18/08 - 8/15/11 and it outperformed the SPY by 17+ points.  Mostly because SPY was down 11 pts.  It's up a little since I closed the pick, but has probably underperformed the market since last Aug.

Key positives were good dividend covered by earnings, cost reduction plans and dominant market player.  Negatives were sensitivity to economy - dependent on discretionary spending, sensitive to fuel costs - biggest non-gov truck fleet in N. America - and sensitive to food cost inputs.

I suspect it's still a good choice for a core income-generating holding. 

If I had to make a call today, I'd bet on the nice dividend and market dominance and give it a green thumb. But, I don't have to and don't feel strongly enough about it to make a call. 

Disclosure:  Still holding MKC

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#13) On April 24, 2012 at 10:34 AM, ElCid16 (96.86) wrote:

Looks like inventory has been outpacing revenue over the past several years.  I'm just speculating here, but wouldn't rock-solid inventory management be needed for a food company?  Maybe a red flag...

CapEx has vastly exceeded depreciation every year for the past 4 years, but where is the top line growth?  Maybe the CapEx this year is due to IT upgrades, but what about 2010, 2009, and 2008?  SYY homers might assume that the company will bring CapEx back down to annual depreciation expense numbers, and that cash flow will bounce back; but what indication has this company given that it will do that?

From an earnings perspective, this company looks mediocre, at best.  From a cash flow perspective, this company looks fairly bad.  Maybe FCF could get back to the $1.0B level in a year or two, but the company is trading for about $17B, and the EV is close to $20B.  This will be the 4th or 5th year in a row that the company hasn't grown earnings. I'd prefer to see FCF closer to $1.5B.  I just don't see that happening.

Just thinking out loud... 

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