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The grocery industry is going through a rough patch currently. The industry has grappling with challenges like stiff competition and aggressive promotional environment. Traditional grocery companies are facing competition from rivals, who are strengthening their franchises and are offering alternative outlets for food and other staples. Customers are also becoming more inclined toward private label products as they are low-cost alternatives to national brands, which are hurting the food companies.

The problems worsened when e-Commerce major Amazon.com, Inc. (AMZN - Free Report) announced an all-cash $13.7 billion deal on Jun 16 to acquire the natural and organic foods supermarket chain Whole Foods Market Inc. . On Aug 28, Amazon closed the Whole Foods deal, following Federal Trade Commission’s approval last week.

The deal’s impact can be clearly seen in lowered grocery prices of Whole Foods, creating apprehensions at several grocery store chains like Kroger Co. (KR - Free Report) , Costco Wholesale Corporation (COST - Free Report) , Sprouts Farmers Market Inc. (SFM - Free Report) of pricing pressure, squeezed margins and dwindling customers. It is also expected to further increase the competition in the industry.

Given this backdrop, let’s try to ascertain which of these two key food players – Sysco Corporation (SYY - Free Report) and McCormick & Company Inc. (MKC - Free Report) , is presently in good shape and can make for a better investment option. We note that both Sysco and McCormick carry the Zacks Rank #3 (Hold), highlighting the fact that they are likely to perform in line with the broader market over the next one to three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Sysco’s market capitalization is $27.4 billion, while that of McCormick is $11.8 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.

Business Operations

Sysco’s earnings have outpaced the Zacks Consensus Estimate in six of the last seven quarters, which have been primarily attributed to its continued focus on acquisitions, volume growth, rewarding shareholders and margin improvement through cost savings. Sysco’s acquisition of London-based Brakes Group in Jul 2016 has benefited the company significantly.

Sysco has also been impressively managing expenses since the past few years. The company is making progress in both SG&A and supply chain and as a result, the company achieved $417 million operating income growth since fiscal 2015 and remains on track to achieve the high end of the three-year adjusted operating income growth target of approximately $600 million to $650 million through the end of FY18.

Though stiff competition and aggressive promotional environment remain a concern, Sysco’s efforts to boost sales and margins are paying up, as the company has delivered positive gross margins in the last nine consecutive quarters, after declining consistently for the last few quarters.

Like Sysco, McCormick’s earnings have also outpaced the Zacks Consensus Estimate in six of the last seven quarters, on the back of rising demand for spices, herbs and seasonings over the last few years. Product innovation, brand marketing support and expanded distribution, as well as pricing actions are also fueling sales growth. However, higher material costs remain its headwinds.

Prices of raw materials such as vanilla, garlic, cinnamon, oregano and rice, as well as packaging costs have been steadily increasing, and thereby affecting McCormick’s margins. Though McCormick is working on its expense structure and remains hopeful to accelerate its margins in the remainder of fiscal 2017, the company expects material cost inflation in mid-single digits for fiscal 2017.

VGM Score

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 or #2 (Buy) and a Value Score of A or B. However, if we consider stocks with a Zacks Rank #3, we should opt for a better grade.

Sysco seems to outpace McCormick on VGM Score as well, as Sysco’s score of A is favorable than McCormick’s VGM Score of D. Hence, we should consider it a favorable investing option.

Price Performance

The food industry has been struggling from quite some time now. However, the concerns aggravated after the Amazon-Whole Foods deal, which is well reflected in the share price performance of the companies as well as the industry. If we look into the last three months performance of these stocks, we note that while the industry declined 8.6% in the said time frame, shares of McCormick slipped 8.5% in the last six months. On the contrary, shares of Sysco declined 4.0% in the same time frame.

Estimate Revisions

Upward estimate revisions are indicative of positive investor sentiment about a stock. The Zacks Consensus Estimate for Sysco has inched up 0.7% for fiscal 2018 and 1.4% for fiscal 2019 over the last 30 days, owing to its solid fourth quarter results. However, the same has gone down 0.3% for fiscal 2017 over the last 30 days for McCormick, reflecting negative outlook on the stock. Encouragingly, the Zacks Consensus Estimate for fiscal 2018 has gone up 2% for McCormick.

Sysco’s earnings for the current fiscal year 2018 ending June 2018 are expected to grow 11.7%, while McCormick earnings per share are projected to grow at a lower rate of 7.7% in its current fiscal year 2017 ending November 2017.

Valuation Multiples

Notably, Sysco has a forward PE ratio (price relative to this year’s earnings) of 18.9, which compares favorably with industry’s average of 20.2 and S&P 500 average of 19.3. McCormick, on the other hand, has a higher forward PE of 23.4. So it is fair to say that a slightly more value-oriented path may be ahead for Sysco stock in the near term too, as you can see in the chart below:

Valuation Multiple

SYY

MKC

Industry

S&P 500

P/E F1

18.9

23.4

20.2

19.3

P/S

0.5

2.7

1.9

3.1

 

If we look into another key metric Price/Sales ratio, we note that right now, Sysco has a P/S ratio of about 0.5. This is significantly lower than the industry average of 1.9 and S&P 500 average, which comes in at 3.1 right now. On the contrary, McCormick has a P/S ratio of 2.7.

The above arguments clearly states that Sysco is better pick investors.

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