Market Share Gains Should Help Sysco Offset Macro-Driven Industry Softness, but Shares Fairly Valued

Narrow-moat Sysco reported 27% sales growth in its fiscal fourth quarter (excluding the extra week), topping our 19% estimate thanks to steeper food inflation (15% in the U.S. versus our call for 9%). While Sysco is not yet seeing softer demand, we plan to lower our U.S. food-service industry case volume forecast to flat for Sysco’s fiscal 2023, from 3% growth previously, as consumers are more likely to eat at home to help curb inflation. But Sysco should be partially insulated from this blow; its market share gains have accelerated per Technomic, with Sysco growing 1.3 times the pace of the industry during fiscal 2022, topping our 1.2 times estimate. Sysco is reaping the rewards of its Recipe for Growth strategy, including supply chain investments, that have resulted in industry-leading on-time/in-full orders per management, causing customers to shift more business its way. Despite our more conservative stance on the industry, we plan a mid-single-digit increase in our $81 fair value estimate, driven by accelerating market share gains and food prices that we now expect to hold stable rather than deflate. But with the shares trading near our valuation, we suggest investors remain on the sidelines.