Company Spotlight - Sysco Corp. (SYY-NYSE)

  In The Kitchen, Making Profits

February 11, 2008 - Sysco Corp. (SYY-NYSE) is the #1 foodservice supplier in North America, serving about 400,000 customers through almost 180 distribution centers in the US and Canada. Its core broadline distribution business supplies both food and non-food products to restaurants, schools, hotels, health care institutions, and other foodservice customers; its SYGMA Network operation focuses on supplying chain restaurants.

Earnings are increasing in a difficult environment. Cost of goods has jumped in the last year, up 6.1% in June of last year, and 5.9% in September. Fortunately for the company, it's been able to pass those added costs onto customers. Unfortunately, that raises prices at restaurants even higher as they pass the added costs onto their customers. With higher gas prices, heating costs, and housing concerns already eating into their wallets and psyches, diners will either order less when they do go out or not bother to dine out at all. Higher prices have a way of diminishing demand. Something I read in economics somewhere.

Sysco isn't waiting for the cost of goods to go down to maintain profitability. It's hired more salespeople to hit the street and stay in closer contact with its customers, writing up reviews for them to increase business. It's also building regional distribution warehouses to store slower moving items, items it can buy in bulk at lower prices, then hold until demand picks up. One is up and running. The second will open in April. Other cost savings implemented: centralized procurement of some items, best practice standardization for all operating companies.

Earnings were 43 cents a share for the second quarter ending in December (fiscal year ends in June), reported on January 28, right in line with expectations. Look for $1.80 for the full year, up from $1.60 in 2007. Analysts predict average annual growth of 13% a year over the next 5 years on revenue increases of 9.5% a year, on average, in the same time period. Revenues were $35 billion last year.

More numbers: Market cap is $16.7 billion on 608.16 million shares. Return on Equity is an impressive 30.5%. Dividend is 3%, paying 88 cents a year, up from 76 cents last year. It takes 46% of profits to pay for it. Net profit margin is 2.9%. Current assets are 1.5 times current liabilities. Debt is 37% of capital.

Sysco is doing well in a tough economic stretch. It's cutting costs where possible, passing on price hikes as needed. But management can only cut costs so much and pass on added costs only so long. Eventually volumes have to rise to increase profits. With the economy slowing and consumers worried, dining out may be one of the first things people cut back or out. Sysco can't control that decision but will be highly affected by it. Don't expect a major break out on the upside for this stock until consumers feel better. On the other hand, this stock is selling at a decent valuation (P/E of 17 when the average annual P/E has been closer to 23) and paying a good dividend. Financial strength is rated A++. All of those should give comfort to rather conservative investors.

Company Web site: www.sysco.com

- Ted Allrich