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Value Dining in a Tough Market

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September 06, 2008 – Comments (1) | RELATED TICKERS: SYY

Decided to take a break from commenting on politcal stuff and post something a little out of the ordinary; a stock pitch.

Sysco (SYY) distributes food products and supplies to restaurants, cafeterias, and institutional dining facilities. You’ve probably seen their trucks on the road.

The company reported 4th quarter FY 2008 earnings on 11 August. Sales were up 5.4% from the 4th quarter of 2007 and up 7.1% for the full year compared to ’07. Earnings per share were also up from the previous year; 12.2% for the quarter and 13.1% for the full year. SYY has beat analysts earnings estimates three of the past four quarters and met the estimates once.

SYY has 9000 trucks, the largest private fleet in North America, so controlling fuel costs is critical. During the conference call, President and Chief Operating Officer Ken Spitler explained part of the success story, “…we continue to manage increased fuel costs by reducing the number of stops, increasing cases per truck, reducing idling time and placing governors on portions of our fleet that prevent trucks from exceeding 60 miles per hour, which not only helps save fuel but improves safety.” Even with the conservation approaches, fuel costs hit operating expenses. However, the company was able to recover about 75% of the expense increases for the year with surcharges to customers. They expect to recover about half the fuel cost increases for 2009 and have entered in to forward pricing agreements for about 30% of their fuel through the first two quarters of 2009.

A risk to the business is inflation in both fuel and food commodity costs. For food, SYY estimated inflation running about 6%. Between passing costs along to customers and working to increase productivity, SYY has been able to absorb the higher commodity costs without taking a big hit to earnings. SYY has also been growing market share.

With energy costs coming down a bit recently, Sysco's productivity increases should work to improve margins. When business improves for the restaurant industry, SYY should do quite well. I don’t know when that will happen, but the company pays a decent dividend while you wait and has increased the payout every year they’ve been public.

The stock carries a 5-star CAPS rating and at a little over 16 times 2009 earnings estimates, SYY trades at a discount to the S&P 500’s PE of about 19 for the same period. For a company that’s managing costs well, actually making money and growing earnings at a double-digit rate, that seems like a bargain.

All conference call quotes are from the transcript at SeekingAlpha.

SYY is my most recent real life stock buy. Have you bought lately or is there something tempting you to click the buy button and why?

 

1 Comments – Post Your Own

#1) On September 06, 2008 at 9:13 PM, ocsurf (< 20) wrote:

I agree with you on this one. They supply quite a few universities out here in the west and Arizona State University just signed a new contract with them.

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