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On Tuesday, Sysco Corporation (NYSE:SYY) reported second quarter results for fiscal 2024 and in the first hour of trading it seems like investors are quite pleased with the results and the stock is up almost 4%. My last article about Sysco was published almost 2 years ago – in February 2022 – and since then the stock hasn’t moved much. I rated the stock as a “Hold” and this was probably the right call as investors only collected dividends in the meantime.
And while the S&P 500 was also not a great investment during these two years, Sysco still underperformed the index. Let’s use the occasion of the quarterly results to provide an update on Sysco and ask the question if the stock is still a “Hold”.
Second Quarter Results
The results Sysco reported were more or less in line with expectations. While revenue missed slightly, the company could beat earnings per share expectations a little bit. But missing by $30 million on $19.3 billion in revenue is really not worth mentioning and we can see results in line with expectations.
Sysco Q2/24 Presentation
Sysco could grow its top line by 3.7% year-over-year and sales increased from $18,594 million in Q2/23 to $19,288 million in Q2/24. Operating income increased from $641 million in the same quarter last year to $700 million this quarter. And finally, diluted earnings per share almost tripled from $0.28 in Q2/23 to $0.82 this quarter. But the reason for the jump in earnings can be found in last year’s quarter, which included a charge of $315.4 million in other expenses related to pension settlement charges.
When looking at adjusted earnings per share we see an increase of 11.3% year-over-year to $0.89 and Sysco reported the 11th consecutive quarter of double-digit adjusted EPS growth.
Reaffirming Guidance
Aside from results being in line with analysts’ expectations, Sysco also reaffirmed its guidance for fiscal 2024. For the full year, management is expecting sales of $80 billion and adjusted earnings per share to be in a range of $4.20 to $4.40. This would result in mid-single digit growth for sales and mid-to-high single digit growth for earnings per share.
Increased Share Buyback Volume
Management also announced it will return approximately $2.25 billion back to shareholders in fiscal 2024. And with Sysco paying about $1 billion annually in dividends, this would lead to $1.25 billion spent on share buybacks. Previously expectations for share buybacks were only $750 million and considering a market capitalization of $38 billion right now, Sysco can repurchase about 3.3% of its outstanding shares in 2024.
And while Sysco has never been buying back shares with an aggressive pace, it constantly lowered the number of outstanding shares. In the last ten years, the number of outstanding shares declined from almost 600 million to 507 million right now and the cumulate cash returned to shareholders (dividend and share buybacks) increased every year.
Sysco Q2/24 Presentation
Growth Assumptions
When looking at Sysco we can be quite optimistic about long-term growth as the company seems to be profiting from several long-term trends, which are tailwinds for the company. The COVID-19 pandemic and the resulting lockdowns were a shock for Sysco – one that is visible in the results as well as the stock price chart – but it seems like many trends are continuing on the “pre-COVID path”.
Sysco Q2/24 Presentation
Looking at the percentage of sales in grocery stores vs. the sales of food services and drinking places, we see a clear trend for the last 2.5 decades. While grocery stores are constantly losing market shares – aside from a few quarters during COVID-19 in which grocery sales skyrocketed – the food services and drinking places are gaining market shares and are now already at 55% market share.
Sysco Q2/24 Presentation
This is also resulting in a constantly growing total addressable market for Sysco over the last decades. Once again, we can clearly see the COVID-19 shock in 2020 but the total addressable market exceeds pre-COVID levels and is at $359 billion right now with Sysco having a market share of 17%.
And not only management seems to be optimistic about future growth – analysts are also expecting growth rates in the high single digits for the years to come. Between fiscal 2023 and fiscal 2028, analysts are expecting earnings per share to grow with a CAGR of 8.50%.
But Also Being Cautious
I have now mentioned in several articles (see here and here for example) that I would be rather cautious in the coming quarters. And in case of a recession, Sysco might also be one of the businesses that could be hit hard. The biggest part of sales is generated by distributing food to restaurants and usually people go less to restaurants when times are tough. On the other hand, sales for education and government as well as hospitals will most likely be stable even during recessions (but these two are only responsible for 15% of total sales). And when talking about restaurants we also must differentiate between expensive restaurants on the one hand or fast-food chains and canteens on the other hand. In case of a recession, people might eat less in more pricey restaurants but instead more frequent in canteens and therefore sales for Sysco might not suffer at all (but we should be cautious about high growth rates).
Sysco Q2/24 Presentation
And when looking at the chart we can make the argument for a trend continuing and a breakout in the coming quarters. But it also seems possible that Sysco will not be able to break above the resistance level which is currently in the range of $85 and $90 and we might see lower stock prices once again.
Reasonably Valued
In the end we can make the argument that Sysco is fairly valued at this point. When determining an intrinsic value for Sysco by using a discount cash flow calculation we are calculating with a 10% discount rate – as always. As basis for our calculation, we take the free cash flow of the last four quarters, which was $1,999 million and when looking at the numbers in the last 10 years this seems like a reasonable assumption. Additionally, we calculate with 507 million outstanding shares and also assume 5% growth from now till perpetuity. When calculating with these assumptions, we get an intrinsic value of $78.86 for Sysco and the stock is fairly valued at this point.
We can also make the argument that 6% annual growth for the bottom line is reasonable. All other assumptions being the same, this would result in an intrinsic value of $98.57 for Sysco and the stock would be undervalued at this point.
As I already mentioned above, the valuation seems reasonable at this point, but these growth assumptions are not taking into account the risk of a recession in the years to come. And although Sysco performed quite well during past recessions – 2020 was an outlier and not a “normal” recession – we should be rather cautious for the next few years as 5% or 6% annual growth might be too optimistic.
Bottom Line
I would continue to see Sysco as a “Hold” and a more or less fairly valued stock at this point. I see slight upside potential but considering the resistance level in the chart and the risk of a recession, I don’t think I would invest in Sysco at this point – like I won’t invest in many other stocks and rather trim positions.
Unlocking the Potential: Why Sysco Stock (NYSE:SYY) is a Smart Investment Choice
When it comes to investing, it’s important to not only consider current trends and market conditions, but also the long-term potential of a company. As one of the world’s largest foodservice distributors, Sysco (NYSE:SYY) has been a steady player in the stock market for over four decades. But what makes Sysco stock stand out as a smart investment choice? In this article, we’ll dive into the company’s financial performance, growth potential, and competitive advantages to understand why Sysco stock is a strong pick for investors.
Overview of Sysco Corporation (NYSE:SYY)
Sysco Corporation (NYSE:SYY) is a leading global foodservice distribution company that serves a wide range of industries such as restaurants, healthcare facilities, schools and universities, retail, and hospitality. The company was founded in 1969 and has since grown to become the top provider of food and related products to restaurants, bakeries, and caterers in North America.
Sysco has a diverse portfolio of over 330,000 products and operates in more than 90 countries worldwide. With a strong focus on customer service and distribution efficiency, the company has established itself as an industry leader and has generated consistent profits over the years.
Financial Performance
One of the main reasons why Sysco stock is a smart investment choice is its consistent financial performance. The company has a strong track record of generating stable revenues and steady dividend payouts. In its most recent financial report for fiscal year 2021, Sysco posted a 12% increase in sales, reaching $52.9 billion, despite the challenges posed by the global pandemic. The company also reported a net income of $993 million, indicating a 34% increase from the previous year.
In addition, Sysco has consistently increased its dividend payouts to shareholders, with a current yield of 2.3%. The company’s strong financial performance and commitment to rewarding shareholders make it a reliable and attractive investment option for income-seeking investors.
Growth Potential
Sysco’s strong financial performance is not just limited to its past track record, but also its future growth potential. The company is continuously expanding its operations through strategic acquisitions and partnerships. For instance, in 2021, Sysco announced the acquisition of Greco and Sons, a leading supplier of Italian foods and authentic ingredients. This move will further strengthen Sysco’s offering in the specialty foods market and expand its customer base.
Additionally, Sysco is investing heavily in innovative technology to improve its distribution and supply chain operations. The company’s focus on digitalization will not only enhance its efficiency but also provide a competitive edge in the fast-paced food distribution industry. With increasing demand for online ordering and delivery services, Sysco’s investment in technology is expected to drive future growth and profitability.
Competitive Advantages
Another crucial factor to consider when investing in a company is its competitive advantages. And Sysco has several key strengths that make it a smart investment choice. The company’s widespread distribution network, with over 330 distribution facilities, provides a significant advantage over its competitors. This extensive network enables Sysco to offer fast and reliable delivery services to its customers, leading to high customer satisfaction and loyalty.
Moreover, Sysco’s strong relationships with suppliers and customers also contribute to its competitive advantage. The company has long-standing partnerships with its vendors, allowing it to negotiate lower prices and secure the best quality products. This, in turn, translates to better margins and profits for Sysco. Through its customer-centric approach and extensive market share, Sysco has become the go-to foodservice distribution provider for businesses of all sizes.
Practical Tips for Investing in Sysco Stock
As with any investment, it’s essential to conduct thorough research and seek expert advice before making a decision. Here are some practical tips for investors looking to add Sysco stock to their portfolio:
1. Understand the market: Familiarize yourself with the foodservice industry and the factors that can impact Sysco’s profitability. This will help you make informed decisions about when to buy or sell Sysco stock.
2. Monitor quarterly reports: Keep an eye on the company’s quarterly financial reports to track its performance and evaluate any potential risks or opportunities.
3. Consider diversification: Investing in a single stock can be risky, so it’s always wise to diversify your portfolio with different investments to mitigate potential losses.
Case Study: Sysco’s Performance during the Pandemic
The global pandemic has had a significant impact on the foodservice industry, causing many companies to struggle to stay afloat. However, Sysco’s strong financial performance during this time demonstrates its resilience and adaptability to challenging market conditions.
With restaurants and other hospitality businesses forced to shut down or limit operations, Sysco’s foodservice sales declined. However, the company was quick to pivot its operations to meet the changing customer needs, such as increasing its capacity for direct-to-consumer sales and expanding its e-commerce capabilities. These initiatives helped Sysco mitigate the negative impact of the pandemic and continue its growth trajectory.
First-Hand Experience: A Sysco Stockholder’s Perspective
As a long-term stockholder of Sysco, I have been consistently impressed by the company’s performance and its ability to overcome challenges and adapt to market changes. The company’s stable dividend payouts and commitment to innovation make me confident in the future potential of my investment. In my opinion, Sysco stock is a solid long-term pick for investors looking for a strong, reliable company in the foodservice industry.
In Conclusion
Sysco (NYSE:SYY) offers investors the perfect combination of consistent financial performance, growth potential, and competitive advantages, making it a smart investment choice. With its expansive distribution network, innovative technology, and customer-centric approach, Sysco is well-positioned to continue its success in the foodservice industry. As always, it’s essential to research and seek professional guidance when making investment decisions, but Sysco stock is undoubtedly one to watch for long-term investors.
