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Reasons Why Sysco (SYY) Can Be a Great Pick for Investors

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The food industry’s performance has been dismal for quite some time now due to the prevailing pricing and competitive pressure. Evolving shopping behavior and increasing presence of small firms have been plaguing the industry. A shift in consumer preference toward non-genetically modified, organic, and gluten free products is also hurting business. The acquisition of Whole Foods by online giant Amazon.com has further made competitors skeptical and raised concerns.

Despite industry-wide issues, Sysco Corporation (SYY - Free Report) has been on a growth trajectory over the last few months. We believe Sysco’s impressive earnings history and solid growth strategies are making the stock a viable bet. Let’s delve deeper and try to find out what’s taking this food company higher.

Why Invest in Sysco?

Favorable Rank and VGM Score: Sysco, with a Zacks Rank #2 (Buy) flaunts a VGM Score of A, which makes it a favorable investing option. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We note that the VGM Score is a comprehensive tool that will allow investors to filter through the standard scoring system and choose better winning stocks. In order to screen out potential winning stocks, we consider only those that have a Zacks Rank #1 or #2 and a VGM Score of A or B.

Share Price Performance: Sysco has exhibited a bullish run in the past six months gaining roughly 4.6% as against the industry’s decline of 7.4%. The industry is currently placed at the top 35% of the 265 Zacks Classified industries. The stock also exceeded the Consumer Staples sector, which gained only 3.8% in the said time frame.

 

 

Further, we believe there is still much momentum left in the stock, which is quite evident from its low beta of 0.52 and a long-term earnings growth rate of 8.4%.

Rising Estimates: Analysts have become increasingly bullish on the stock over the last 60 days with estimates moving up. The Zacks Consensus Estimate for the current quarter is pegged at 73 cents, up from 72 cents per share in the said time frame. Similarly for fiscal 2018, the Zacks Consensus Estimate increased from $2.75 per share to $2.77, over the same time frame.

Impressive Earnings History: Sysco delivered positive earnings surprises in six of the past seven quarters, with in-line results in one. Acquisition and margin improvement has been driving the company’s earnings. We note that Sysco has been consistently witnessing an improvement in sales, driven by acquisitions and volume growth. The buyouts of London-based Brakes Group and Supplies on the Fly e-commerce platform are encouraging. Sysco’s acquisition of London-based Brakes Group in July 2016 has benefited the company significantly. In fiscal 2017, Brakes performed reasonably well in midst of challenging environment in UK and it recorded earnings of 14 cents per share, exceeding its EPS estimates. Brakes is also making good progress in its supply chain transformational efforts, which is helping them to be efficient and will ultimately improve overall service and reduce costs.

Sysco Corporation Price, Consensus and EPS Surprise

 

Sysco Corporation Price, Consensus and EPS Surprise | Sysco Corporation Quote

 

Improving Margins: Sysco has been impressively managing expenses since the past few years and is making progress in both SG&A and supply chain, which is reflected in higher operating income growth.

Further, Sysco delivered positive gross margins in the last nine quarters, after declining consistently since the last two fiscal. Modest inflation will also lead to margin improvement. Sysco was under deflationary pressure for an unprecedented six consecutive quarters, and the trend is finally beginning to shift toward inflation from the third quarter of fiscal 2017. Meat prices are abating, and dairy and produce prices have also begun to rise.

Valuation Multiples: If we look into the company’s P/E and P/S multiples, we note that the company generally trades below its industry average.

Sysco has a forward PE ratio of 19.6. This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 is 22.5. Further, the stock’s PE also compares favorably with the Zacks classified industry’s PE ratio, which is pegged at 20.3. This indicates that the stock is relatively undervalued right now, compared to its peers.

Right now, Sysco has a P/S ratio of about 0.5. This is significantly lower than the industry average of 1.8 and S&P 500 average, which comes in at 12.5 right now.

Looking for More? Check These 3 Trending Consumer Staple Stocks

Investors interested in the same sector may also consider some other top-ranked stocks such as Estee Lauder Companies, Inc. (EL - Free Report) , McCormick & Company, Inc. (MKC - Free Report) and Lamb Weston Holdings Inc. (LW - Free Report) .

Estee Lauder and McCormick, both sporting a Zacks Rank #1, have long-term earnings growth rates of 12.0% and 9.4%, respectively.

Lamb Weston, with a Zacks Rank #2, has a long-term earnings growth rate of 6.3%.

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