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Sysco (SYY) Touches 52-Week High: More Room for Growth?

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Sysco Corporation (SYY - Free Report) hit a new 52-week high of $66.97 on Jun 19, before closing the day at $66.9. The company is gaining from solid performance in U.S. Foodservice Operations, cost-cutting initiatives and strategic acquisitions. 
 
Further, shares of this Zacks Rank #3 (Hold) company have gained 10.7%, outperforming the industry’s growth of 1.6% in the past three months. While the broader Consumer Staples sector declined 4.3%, the S&P 500 gained 2.1%. We believe the stock still has upside potential as apparent from a VGM Score of A and long-term earnings growth rate of 10.4%.
 
 
 
Furthermore, analysts are steadily becoming optimistic about the stock. This is apparent from the rise in earnings estimates. The Zacks Consensus Estimate of $2.98 for fiscal 2018 earnings has moved north by 3 cents in the last 60 days. Also, the company delivered an average positive earnings surprise of 2.25% in the trailing four quarters. It has surpassed sales estimates in nine of the last 10 quarters as well.
 
What's Driving the Stock?

Sysco’s earnings surpassed the consensus mark, for the fourth straight quarter, in the third quarter of fiscal 2018. The company witnessed year-over-year growth in both the top and bottom lines. The primary reason behind strong results is its U.S. Foodservice Operations segment, wherein sales advanced 5.1% to $9,704.5 million on 2.6% growth in local case volume within U.S. Broadline operations, with total case volumes up 2.4%. Notably, local case volumes in this segment have been rising year over year for 16 consecutive quarters. Additionally, rising restaurant sales have been benefiting the company’s U.S. operations for a while now. Further, the company’s performance gained from lower taxes and favorable results in the international segment. Management expects these upsides to continue in the forthcoming periods as well.

Sysco has been actively pursuing strategic acquisitions to enhance its portfolio and expand its base. In this regard, the company closed its Kent Foods buyout during the fiscal third quarter and expects the same to bolster the U.K. and European business bandwagon. During the fiscal third quarter, the company also concluded the acquisitions pertaining to Hawaii-based HFM FoodService and Louisiana-based Doerle Food Service. Incidentally, the HFM buyout aided the company’s U.S. Broadline operations during the quarter. Sysco also remains on track with the integration process of London-based Brakes Group that was acquired in July 2016.

Apart from this, the company is likely to continue gaining from its recently highlighted three-year financial goals. These include enhancing consumers’ experience, optimizing business, stimulating power of its people and achieving operational efficacy. Progressing in this line, the company remains focused on enhancing assortments, making constant innovations, ensuring food safety and revitalizing brands. Further, to evolve with the changing consumer preferences, Sysco remains committed toward investing in technology and enhancing e-commerce operations. Moreover, it plans to improve supply chain, increase transparency, enhance deliveries and manage product costs effectively.

All said, management believes that the company is well placed to achieve adjusted operating income improvement in the higher end of its targeted range of $600-$650 million.

 
Wrapping Up
 
However, the company has been witnessing year-over-year contraction in gross margin for the past three quarters. In third-quarter fiscal 2018, gross margin contracted 9 basis points to 18.65%. The company continues to bear the brunt of higher inbound freight costs, which stemmed from driver availability challenges in the industry.  
 
Nonetheless, we expect the company’s growth drivers to offset these hurdles and help Sysco continue with its bullish run.
 
Besides Sysco, Darling Ingredients (DAR - Free Report) , Medifast (MED - Free Report) and Nomad Foods (NOMD - Free Report) scaled 52-week highs on Jun 19. 
 
Shares of Medifast hit a 52-week high of $171.59, though it closed a tad lower at $171.44. The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Shares of Darling Ingredients hit a 52-week high of $19.92, though it closed a tad lower at $19.8. It carries a Zacks Rank #3.
 
Shares of Normad Foods hit a 52-week high of $18.91, though it closed a tad lower at $18.8. It has a Zacks Rank #3.
 
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