Sysco's Sales and Profits Keep Trucking
With shares trading in line with our valuation, we'd suggest investors await a more attractive entry point.
Even amid a highly competitive operating landscape, narrow-moat Sysco (SYY) closed the book on a year that included modest sales growth (up 1.6% on an underlying basis) and 43 basis points of adjusted gross margin expansion to 18.4%, which we perceive as solid performance. And we anticipate that its focus on driving sustainable and profitable growth will persist (with plans in place to drive $600 million-$650 million of operating income improvement through the end of fiscal 2018--an achievable target in our eyes). While we intend to re-examine our assumptions, we don’t foresee a material shift in our $50 fair value estimate; shares trade in line with our valuation, and we’d suggest investors await a more attractive entry point.
Beyond its internal efforts, we think the most significant factor that stands to impact the business heading into fiscal 2018 surrounds the drastic shift to an inflationary environment (from the deflationary conditions that have characterized the industry over the last two years), particularly reflecting an uptick in produce, poultry, dairy, and seafood costs. But even in the face of cost pressures, we believe Sysco now has a better grasp on its cost structure, as evidenced by the 4% growth chalked up in adjusted gross profit (on top of comparable growth a year ago) that far outpaced the just 1.7% increase in adjusted operating expenses. And we don’t view this as a negative for Sysco’s operations, in line with management rhetoric that 2%-3% inflation tends to be its sweet spot, making the pass-through of these higher costs to its customers (and ultimately the end consumer) fairly seamless and unlikely to result in a significant or lasting erosion in volumes. However, if inflationary trends were to become more pronounced, we portend Sysco could either be forced to bear the brunt of these higher costs--constraining profits--or potentially opt to surrender some of its leading share position and preserve profitability.
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Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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