Sysco’s Industry Leading Scale Drives Continued Profit Growth

Summary

Sysco’s 3Q21 earnings reveal the firm’s “moat” is getting larger and could lead to years of profit growth.

Sysco’s scale allows it to mitigate supply chain disruptions in serving its customers. Management notes it is able “to deliver higher fill rates for customers than the industry average.”

Assuming a return to pre-COVID margins and meeting consensus revenue estimates, the stock is worth $103/share today – 36% above the current price.

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Michael Vi/iStock Editorial via Getty Images Sysco Corp. ( SYY ) joined our list of Long Ideas in December 2017 , and we included it in our “See Through the Dip” thesis in April 2020 . The stock outperformed the market pre-COVID but has lagged since. However, the country’s largest food service supplier is outexecuting the competition and taking market share. As we’ll show in this report, the stock could be worth $103/share today. Scale Advantage Gives Sysco’s Stock More Upside

Sysco’s 3Q21 earnings reveal the firm’s “moat” is getting larger and could lead to years of profit growth. An extensive and efficient distribution network coupled with a large existing customer base are important drivers of Sysco’s value.

Sysco’s scale allows it to mitigate supply chain disruptions in serving its customers. Management notes it is able “to deliver higher fill rates for customers than the industry average.” The company added 25,000 service locations in fiscal 2021 and management declared in the fiscal 1Q22 earnings call “we’re winning more new business than at any other point in time in Company history”.

Assuming a return to pre-COVID margins and meeting consensus revenue estimates, the stock is worth $103/share today – 36% above the current price.

Figure 1: Long Idea Performance: From Date of Publication Through 11/16/2021 Sources: New Constructs, LLC and company filings What’s Working For The Firm

Revenue Grows Above Pre-Pandemic Levels. Sysco beat top-line expectations in fiscal 1Q22, reporting an increase in revenues of 40% year-over-year (YoY). Revenues for the quarter were 8% above pre-pandemic fiscal 1Q20 (13 weeks ended September 28, 2019) levels. The company also provided preliminary October sales results showing a 10% increase over 2019 levels.

Return to Dining, On and Off Premise, Drives Demand. The return of customers to restaurants yielded the increased consumption of paper and disposable products that drove Sysco’s YoY revenue gains. Sales from the company’s paper and disposables segment grew 29% YoY while its overall U.S. Foodservice operations grew 46% YoY. Sales in the company’s SYGMA segment, which encompasses its U.S. distribution operations for quick-service chain restaurants, grew 12% YoY and are 18% above fiscal 1Q20 levels.

Growing Market Share. We noted in our report from April 2020 that the pandemic gave Sysco an opportunity to grow its market share by making smart acquisitions. In fiscal 1Q22, Sysco acquired Greco and Sons as the company seeks to expand its presence in the fast-growing specialty foods segment . The company plans to expand Greco & Sons nationally across the Sysco network and create a nationwide Italian segment platform. Management expects the acquisition to contribute $1 billion (2% of fiscal 2021 revenue) of revenue in fiscal 2022.

Apart from acquisitions, Sysco’s strong sales team and superior distribution network are integral in growing its existing operations. After adding 25,000 service locations in fiscal 2021, a 4% YoY improvement, the company continues to win new customer at a rapid pace. In its fiscal 1Q22 earnings call , the company stated, “we’re winning more new business than at any other point in time in Company history” which is leading to market share gains. Sysco’s share of the U.S. foodservice market improved from 16% in calendar 2019 to 17% in calendar 2020. Furthermore, the company believes it’s on target to grow 1.2x the market in fiscal 2022.

Sysco Is Bigger and More Profitable Than Peers. Sysco’s TTM net operating profit after tax ( NOPAT ) margin grew from 1% in fiscal 3Q21 to 3% in fiscal 1Q22, while its invested capital turns improved from 2.8 to 3.6 over the same time. Rising NOPAT margins and invested capital turns drive Sysco’s TTM return on invested capital ( ROIC ) from 3% in fiscal 3Q21 to 10% in fiscal 1Q22. Per Figure 2, Sysco’s ROIC is twice as high as its nearest peer.

Figure 2: Sysco’s Profitability Vs. Peers: TTM Sources: New Constructs, LLC and company filings W hat’s Not Working For The Firm

International Exposure […]

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