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Balanced View on Sysco Corp.

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On Jun 6, 2014, we issued an updated research report on Sysco Corporation (SYY - Free Report) . This global food products maker and distributor recently reported weak third-quarter fiscal 2014 results on May 5.

Sysco’s earnings and revenues lagged the Zacks Consensus Estimate. Earnings of 38 cents per share declined from the prior-year quarter by 5.0% due to modest sales growth and cost pressures. The results were dampened by a sluggish macro-economic scenario and weather related headwinds, which in turn led to lower consumer spending. However, March sales were significantly stronger compared to January and February as improved weather rebounded demand and locally-managed sales strengthened.

Though sales grew 3.2% in March, aided by improved sales trend of the locally managed customers, it was weaker than 4.1% in the fiscal second quarter and 5.7% in the fiscal first quarter owing to a difficult consumer spending environment. Gross margin was flat at 17.7% due to ongoing cost pressure. Adjusted operating margin declined 10 basis points to 3.4% due to a 3.3% increase in adjusted operating expenses.

Amid the challenging macroeconomic environment, the company’s long term fundamentals are solid. The company’s growth strategy remains strong and its efforts to reduce costs and improve efficiency are appealing. The company has implemented several short-term steps and longer term strategic initiatives to accelerate sales and mitigate the ongoing gross margin pressure.

These actions are gaining traction and the company expects to see gradual improvement in these areas through the balance of 2014 and beyond. The company also expects additional progress in productivity over the next several months.

Moreover, Sysco’s acquisition deal with US Foods, as announced in Dec 2013, will create one of the largest food companies in the country. The merger will give Sysco increased size and scale in this low-margin business and will also provide significant cost savings opportunities.

Sysco now carries a Zacks Rank #4 (Sell).

Key Picks from the Sector

Some better-ranked companies in the food industry include B&G Foods Inc. (BGS - Free Report) , BRF S.A. (BRFS - Free Report) and The Hain Celestial Group, Inc. (HAIN - Free Report) . While B&G Foods and BRF S.A. carry a Zacks Rank #1 (Strong Buy), Hain Celestial holds a Zacks Rank #2 (Buy).

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