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I have covered the Sysco Corporation ( SYY ) zero times – and that’s an issue because I didn’t buy it when it was even cheaper than it is today. The company fell from $85 to almost $35 during the pandemic – although just briefly – as it’s one of the world’s largest foodservice companies. It caters to restaurants, hospitals, schools, and related and is generating a ton of value while doing so. In an environment where growth-crushing pandemics are not a regular thing, we’re dealing with a company that continues to be in an excellent position to deliver strong dividend growth and capital gains. Moreover, the balance sheet is being repaired at a rapid pace and free cash flow implies a ton of value for investors. In this article, I want to share my thoughts and walk you through my thinking process.
So, bear with me! This Pandemic Recovery Is Impressive
Sysco has a $39.9 billion market cap, which makes it one of the largest companies in the food distribution industry, which is part of the consumer defensive sector.
Sysco Corporation is an American multinational corporation involved in marketing and distributing food products, small wares, kitchen equipment, and tabletop items to restaurants, healthcare, and educational facilities, hospitality businesses like hotels and inns, and wholesale to other companies that provide food service (like Aramark and Sodexo). The company is headquartered in the Energy Corridor district of Houston, Texas, where it was founded in 1969.
The company generated 66% of its sales from restaurants followed by a well-diversified mix consisting of healthcare facilities, schools, travel, and others. In case the legend is hard to read, the company operates in the light blue countries on the map below. The dark blue color indicates no business. The green color says, “International Food Group”. According to the company : As the export specialty division of Sysco, IFG delivers expertise in product selection, services and value chain capabilities to customers in over 80 countries across the globe. Every day, US based restaurant chains ranging from fine dining to quick service rely on Sysco IFG to help deliver their brand and unique customer experience across the globe. With over 700 customers, we also export Sysco’s brands of products to numerous distributors in many of the countries in which we do business. Sysco Corp. In the United States, the company has a 17% market share in a highly fragmented $300 billion industry. The company increased its market share by 100 basis points compared to 2020. The company serves less than 50% of independent restaurants in the United States, which I think is already a stunningly high number, yet management says that market penetration is one of the ways to gain strong short- to long-term growth. I agree with that as it has an edge over a lot of smaller companies in the industry.
The company has outstanding online capabilities that make it easy for customers to order. Adding to that, the company is building an omnichannel inventory system and distribution order management system to broaden its supply chain. Especially in current times, a great relationship with sellers is a pro.
This includes the company’s sales force, which is focused on consultative selling instead of administrative task management, which makes selling very efficient.
As a result, the company claims that it recovered 1.2-1.5x faster than its industry from the pandemic. Excluding dividends, the company made a new all-time high in the first half of 2021 after falling more than 60% during the pandemic when more or less everything was shut down. Restaurants, schools, hotels, everything was closed except for nursing homes and related, for obvious reasons. Hence, a company as solid as SYY sold off like a bank, which is truly remarkable. Data by YCharts With that said, the company’s EBITDA is expected to exceed pre-pandemic levels in the year ending June 30, 2023, at more than $4.0 billion. In that year, Sysco is expected to boost free cash flow to $2.1 billion. That implies a 5.3% free cash flow yield using a $40 billion market cap. Bear in mind, free cash flow is net income adjusted for non-cash items and capital expenditures. It’s basically cash the company can spend on buybacks, dividends, debt reduction, and related. TIKR.com The free cash flow yield could rise to 6.3% in the 2024 fiscal year. Historically speaking, that’s a good deal as the FCF yield has exceeded 6% just twice in its history – one of them was during the […]
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