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Sysco or Supervalu: Which Food Stock Looks Better Placed?

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The grocery business is grappling with headwinds like food deflation, stiff competition, and aggressive promotional environment. These headwinds have led to a sharp decline in the share price of major food grocers like The Kroger Co. (KR - Free Report) , Whole Foods Market, Inc. , and Sprouts Farmers Market (SFM - Free Report) . Oversupply in some types of food -- particularly meat, poultry and dairy -- has dragged prices lower and forced grocery stores into more aggressive promotions.

The not-so-impressive scenario in the food/grocery industry is evident from the fact that out of the 260-plus industries, the Food-Miscellaneous Industry holds a Zacks Industry Rank #192. It falls in the bottom one-third of all Industry Ranks, which signals that the outlook for the industry is ‘Negative.’ We rank all the 260-plus industries in 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

Given this backdrop, let’s try to ascertain which of these two key food players – Sysco Corporation (SYY - Free Report) and Supervalu, Inc. , presently make for a better investment option in face of the headwinds plaguing the food industry.

Sysco’s market capitalization is $30.42 billion, while that of Supervalu is a mere $1.27 billion. Going by its business size, Sysco is undoubtedly a winner. Though Sysco’s massive scale of operations better position it in the long term, short-term industry headwinds are likely to adversely impact both the companies.

Sysco has been facing deflationary pressure since the first quarter of fiscal 2016, when sales growth was minimal and earnings were essentially flat due to the unfavorable impact of both food cost deflation and currency translation. The company experienced continued deflation in center-of-the-plate protein categories, such as meat and seafood, along with deflation in dairy. The deflationary trend is likely to continue in calendar year 2017, creating modest sales and gross profit headwind.

Supervalu is also facing competitive pressure that has hit the grocery industry as traditional grocery rivals are strengthening their franchises and outside players offering alternative outlets for food and other staples. Customers are becoming more and more receptive to purchasing private label products as a lower cost alternative to national brands.

The company expects the trend to continue in the near term. On top of it, the company is facing food deflation across major parts of the market since the past two quarters that has further contributed to Supervalu's difficulties.

Let’s delve into the some more details.

Zacks Rank

Our proprietary Zacks Rank, which is designed to predict price movements over the next one to three months, comes in handy in this scenario. Going by this metric, Sysco is a better bet as it carries a Zacks Rank #2 (Buy), highlighting the fact that it is likely to outperform the broader market over the next one to three months. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

On the other hand, Supervalu carries a Zacks Rank #3 (Hold), highlighting the fact that it is likely to perform in-line with the broader market over the next few months.

The favorable Zacks Rank of Sysco is primarily attributable to its focus on acquisitions, volume growth, and margin improvement that drive its revenues and earnings. We note that Sysco’s sales have been increasing consistently on the back of acquisitions and volume growth.

Further, the company’s growth strategy is paying off. Sysco has delivered positive gross margin in the last six consecutive quarters, after declining consistently over the last two fiscal. Activist investor Trian Fund Management also increased its stake in the company, demonstrating its confidence.

On the other hand, Supervalu’s sales have been moving lower since the past many quarters due to softer comps. Though Supervalu is trying to keep its costs down, its selling and administrative expenses have been higher than its revenues. Costs related to the potential separation of Save-A-Lot from the remainder of Supervalu's operating businesses are also adding to overhead expenses.

Price Performance

The impact of the updates is well-reflected in the price performance of the companies so far this year. While shares of Supervalu have underperformed the Zacks categorized Food-Miscellaneous/Diversified Market industry, those of Sysco have significantly outpaced the broader industry. Shares of Sysco improved 35.39% on a year-to-date basis, while Supervalu slipped significantly by 28.91% year-to-date. The industry has advanced 7.13% year-to-date.

 

 

Estimate Revisions

Upward estimate revisions are indicative of positive investor sentiment about a stock. The Zacks Consensus Estimate for Sysco has climbed 3.9% for fiscal 2017 and 1.5% for fiscal 2018 over the last 60 days period. However, the same has gone down 3.2% for fiscal 2017 and 7.9% for fiscal 2018 over the last 60 days at Supervalu, reflecting pessimism about the stock.

Sysco’s earnings in fiscal 2017 and 2018 are expected to grow 14.76% and 10.49%, respectively. However, the scenario is not favorable for Supervalu due to industry-wide headwinds. Earnings per share are projected to contract a respective 20.2% and 4.4%, respectively in fiscal 2017 and 2018.

VGM Score

Supervalu seems to outpace Sysco on Style Score. While both Sysco and Supervalu carry favorable Value and Growth Style Scores, Eden Prairie, MN-based Supervalu’s score of ‘A’ is better than Sysco’s score of ‘B.’ Supervalu’s VGM score is also ‘A,’ compared with Sysco’s score of ‘B.’

With the help of our new style score system, it is easy to pick the winning stocks. In order to screen out potential value stocks, we consider only those that have a Zacks Rank #1 (Strong Buy) or #2 (Buy) and a value score of ‘A’ or ‘B.’

Therefore, Sysco’s Zacks Rank #2 when combined with its attractive VGM Score of ‘B’ makes it a favorable investing option.

The above arguments clearly states that Sysco is better place currently and should offer great value for investors.

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