A prudent investment decision involves buying stocks that offer solid prospects and selling those that appear risky. Again, at times it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions. These stocks rally as soon as the market enters into a correction mode. Here we have discussed one such stock, Sysco Corp. SYY, with expected long-term earnings per share growth rate of 8.76% and a VGM Score of “B”.
Sysco’s stock price history reveals that the company hasn’t disappointed investors in a long time. This is quite prominent from the 32.3% surge in the company’s shares on a year-to-date basis. We believe that this rally has been driven by Sysco’s impressive earnings history and solid growth strategies.
Starting with Sysco’s past performance, we note that its first-quarter fiscal 2017 earnings per share exceeded the Zacks Consensus Estimate while revenues were in line with the same. The acquisition of London-based Brakes Group and margin improvement probably drove the earnings beat. Adjusted earnings were up 28.8% year over year on the back of expense management and improved margins. Sales also increased 11.2% on a year-over-year basis, despite unfavorable currency.
We note that Sysco has been consistently showcasing an improvement in sales, driven by acquisitions and volume growth. The buyouts of Brakes Group and Supplies on the Fly e-commerce platform are encouraging.
Further, it seems that the company’s growth strategy is paying off and its efforts to boost sales and margins are bearing fruit. Sysco has delivered positive gross margins in the last six consecutive quarters, after consistent declines since the last two fiscal years. Activist investor Trian Fund Management also bolstered its stake in the company.
Additionally, Sysco has a consistent track record of returning cash to shareholders in the form of dividend payments. The company has increased its dividend 48 times since its establishment in 1970. The latest dividend increase of 6%, announced on Nov 18, was above management’s projection of a forward five-year dividend growth rate of 3%–5%.
However, persistent food-cost deflation remains a concern since the past few quarters. The company has experienced continued deflation in center-of-the-plate protein categories, such as meat and seafood, as well as in dairy. This deflationary trend is likely to continue in 2017, creating a modest sales and gross profit headwind.
During the first quarter, Sysco also encountered rising expenses. Apart from the Brakes acquisition, the increase in expenses stemmed from higher case volumes and a timing shift of expenses related to the option grants from the second quarter of fiscal 2017 to the first.
The restaurant industry, which represents approximately 60% of the food service market, is experiencing soft growth in recent quarters. Restaurant traffic continues to show year-over-year declines and restaurant spend has decelerated as well. As a result, the company anticipates modest case volume growth for the upcoming quarters.
We expect the aforementioned factors to help this Zacks Rank #3 (Hold) company sustain its strong momentum and stay afloat even amid difficult times. Hence, we suggest investors to hold on to the stock as the rest is a wait-and-watch story.
Stocks that Warrant a Look
Some better-ranked stocks in the food industry include General Mills, Inc. GIS, Ingredion, Inc. INGR and Lancaster Colony Corporation LANC, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
General Mills has an average positive earnings surprise of 4.37% in the trailing four quarters. It also has a long-term earnings growth rate of 8.18%.
While Ingredion has a long-term earnings growth rate of 11.00%, Lancaster Colony has a growth rate of 3.00%.
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