Savoring Sysco (SYY)

Sysco Corp (SYY) is the leading food service distributor in the U.S. and Canada with over 400,000 customers and 186 distribution facilities.  It delivers some 300,000 food and related products to restaurants (62% of FY 2009 sales), hospitals and nursing homes (11%), hotels and motels (6%), and schools (5%).

 SYY was the Online Stock Study for April at the Better Investing website that was led by Shanna Rendon, a BI Board Member.  Erin Swanson, the Morningstar analyst who covers SYY, also participated.

I compared Shanna’s SSG (discussed in the webinar recording) with two of mine and with Take Stock.  I also examined if Sysco, with $2.468 Billion in Long-Term Debt and a Debt to Equity Ratio of 70.9% in 2009, has too much debt, looked at its ROE downtrend, and briefly reviewed its quality.

Company Background

- Sysco is organized into three segments, the most important of which are Broadline and SYGMA:

** Broadline, with 99 facilities, is its main division and distributes a broad line of food and non-food products to restaurants and other local customers.  It accounted for 79.4% of SYY’s sales last year [2009 Annual Report, page 17, PDF page 37].

** SYGMA, with 20 facilities, distributes food and non-food products to chain restaurants such as Wendy’s/Arby’s, its largest customer.  This segment accounted for 13.1% of FY 2009 sales.

- Morningstar reported that Sysco has made 145 acquisitions since its founding some 40 years ago.  As a result, it has developed a wide-reaching distribution network that has allowed it to become a low price leader which no other competitor can match.

** This extensive distribution network and the breadth of its products and services give SSY a competitive advantage which Morningstar calls a “wide moat.”

- SYY recently paid $218M cash for three broadline foodservice operations (in Ireland, Los Angeles, Boston) and a produce distributor in Toronto [2009 10K, page 58, PDF page 78].

SSG Discussion

- The following table compares Shanna’s SSG with two of mine and with Take Stock.  Both of my SSGs use the same judgments, but Armin-1 uses Morningstar-Hemscott data (as Shanna did) while Armin-2 uses S&P data.

- After the table, I briefly discuss two SSG issues and then focus on Sysco’s Pre-Tax Profit Margin and Return on Equity.  I end with my assessment of whether SYY has too much debt.

Sysco Corp           (SYY)	SSG by ShannaR	Armin-1	Armin-2	Take Stock
Date	3-5-10 data       3-12-10 price	4-1-10 data        4-7-10 price	Same                Same	Same
Data	Hemscott-Morningstar	Same	S&P	Hemscott-Morningstar
Price	$28.64	$29.81	Same	Same
52 week High &     Low Price	$29.58 & $20.63	$30.00 & $21.26	Same	Not Used
Last Quarter of     Reported Data	Q2 ending        12-31-09	Same	Same	Same
Software Used	TK 6	Same	Same	TS Online
Project Growth      From End of	Last Q	Same	Same	Last FY
Sales Growth	5.00%	6.50%	Same	- 1.70%
EPS Growth	5.00%	6.50%	Same	- 2.14%
High PE	20.0	19.6                  (from 2009)	19.8                   (from 2009)	23.2
High EPS	$2.44	$2.62	$2.55	$1.59
High Price	$48.80               (8% > VL)	$51.40                 (14% > VL)	$50.50              (12% > VL)	$36.90                (8% < VL)
** Value Line Estimated High Price = $40-45 as of 1-29-10 **
Low PE	14.0	15.2                     (from 2008)	14.7                      (from 2008)	16.3
Low EPS	$1.77	$1.92 (ttm)	$1.86 (ttm)	$1.76
Low Price	$19.50                (recent severe low price)	$23.80               (80% of current price)	Same      (Same)	$29.81           (same as current price)
Upside/Down	2.2	3.6	3.5	Impossible to Calculate
Total Return	13.7%	14.0%	13.50%	8.3%
SSG Buy Under	$26.79	$28.48	$27.83	$21.93
RV/PRV                 (outliers)	66.4/62.8            (no outs)	95.1/88.9            (05-07 out)	98.2/92.3 (Same)	Not Used
RV/PRV                     (no outiers)	66.4/62.8	77.2/72.3	79.6/74.9	Not Used
Quality	Mstar =              4 of 5 stars	TS = 1.60          unacceptable	S&P = A+	TS = 1.60 unacceptable
PTPM – 5 yr ave	4.70%                Trend even	Same                Same	Same                Same	Same         Trend N/A
ROE – 5 yr ave        Ending Yr Equity	Not Used	30.6%                  Trend even	Same                Same	Same         Trend N/A
ROE – 5 yr ave     Begin Yr Equity	32.9%                Trend down	Same                 Same	30.5%             Trend even	Not Used
Debt to Equity –     5 yr ave	53.2%                 Trend up	Same                  Same	64.7%                Trend up	Not Used

Estimating Future Sales and EPS Growth for the Next 5 Years:

Shanna’s SSG:

- Presentation slide #42 shows that Shanna considered SYY’s historic growth for the last 10 years of 7.8% Sales and 10.4% EPS.  She also found four long-term growth estimates: from Zacks, Sales at 4.85% and EPS at 15.0%; from S&P, EPS at 15%; from Morningstar, EPS at 10.5%; and from VL, Sales at 3.5% and EPS at 6.5%. 

** VL’s 3.5% estimate was actually for sales per share, not sales.

- Shanna decided to estimate 5.0% Sales and 5.0% EPS growth primarily to be conservative.

Armin-1 and Armin-2:

- I always check seven different analyst estimates (not just seven websites) which were averaging 11.86% long-term EPS when I did my SSG.  Three (S&P, Yahoo Finance & Zacks) were high at 15.00% while VL was low at 6.50%. The remaining three (Reuters.com, Morningstar, & CNNMoney) were each estimating 10.50%.

** Reuters 2 analysts estimated 15.00% high and 6.00% low.  Reuters is now the only one of the seven that provides this extra detail as CNNMoney, which used to, has redesigned its website. 

- I decided to use 6.50%, VL’s estimate and the lowest of the seven analysts.

- For how I estimate EPS for all my SSGs, see Estimating EPS: click here.

Take Stock:

- Take Stock estimated growth for the next 5 years at –1.70% Sales and -2.14% EPS (both are negative projections).  To put these numbers in perspective, the very lowest estimate by any analyst was 6.00% EPS by one forecaster at Reuters.

Final SSG Results

- None of the four studies resulted in a SSG Buy which requires a minimum 3.0 Upside/Downside Ratio AND a 15.0% Total Return:

• Shanna’s SSG got a 2.2 U/D and a 13.7% TR;
• Armin-1 came closest with a 3.6 U/D and a 14.0% TR;
• Armin-2 got a 3.5 U/D and a 13.5% TR; and
• Take Stock doesn’t use any U/D and got only a 8.3% TR

Pre-Tax Profit Margin (PTPM) and Return on Equity (ROE)

- Sysco’s 5 year averages are a mixed bag: PTPM is trending even, ROE with ending year Equity is trending even while ROE with starting year Equity is trending down, both with S&P as well as Morningstar-Hemscott data.

- The industry data I use for comparisons only includes ROE with ending year equity.

Industry Comparisons using Morningstar-Hemscott Data:

- Sysco’s 5-year average PTPM is better than its industry average (4.7% vs 3.2%, Food Distribution Industry) and SYY ranks #3 out of 13 companies.

- Sysco’s 5-year average ROE with ending equity is much better than its industry average (30.6% vs 17.1%) and ranks #2.  There is no industry data for ROE with starting equity.

- However, the ROE of two companies (DIT #1 at 35.7% and SYY #2 at 30.6%) seem like atypical outliers, especially when compared to the average of the five other companies with a positive ROE (10.76%).

Industry Comparisons using S&P Data:

- SYY’s PTPM is much better than its industry average (4.7% vs 2.7%, Food Distribution Industry). There is no company-by-company breakdown if the S&P industry data.

- SYY’s ROE with ending equity is also much better than its industry average (30.5% vs 16.7%).  There is no industry data for ROE with starting equity.

Quality

- S&P gave Sysco an A+, its highest of 8 quality rankings.  In contrast, Take Stock gave SYY a failing grade of 1.6 with a minimum 3.4 required to pass, 6.7 desired, and 10.0 the max. 

- Morningstar makes no quality assessment and Shanna added its star rating to her SSG.  The 4 out of 5 stars meant that SYY was a good buy, that it was then selling at a large discount to Mstar’s fair value estimate.

Does SYY Have Too Much Debt?

- As of 4-1-10, my SSG data from Hemscott-Morningstar (which Shanna used) shows that Sysco had $2.468 Billion in Long-Term Debt, a Debt to Equity Ratio of 70.9% in 2009, and a five-year average Debt to Equity Ratio of 53.2%.  The company also had a Debt to Total Capital Ratio of 41.7%

** Moreover, SYY’s L-T Debt increased 25% last year, from $1.975 Billion in FY 2008 to $2.478 Billion in FY 2009.

-  Does SYY have too much debt which is a more difficult question to answer than whether the company can safely manage its debt?? 

- Sysco’s 2009 10K Report to the SEC:

- Total Debt was $2.477B as of 6-27-09 and Sysco’s L-T Debt to Total Capital Ratio was 41.8% in 2009, up from 36.8% in 2008 [page 13, PDF page 19).  SYY reported that it is required to maintain a L-T Debt to Total Capital Ratio below a specified level and states that it is “in compliance” with all such requirements [page 25, PDF page 31]. 

- No details were provided (unlike CHD which set forth its two required ratios and its compliance; click here).  The 25% new debt was not explained nor was there any discussion, other than a simple list, that principal repayments on SYY’s debt would balloon from $9.16 M in 2010 to $204.390 M in 2012, $251.314 M in 2013, and $206.89M in 2014 [page 46, PDF page 66].

- I wrote Investor Relations which replied that SYY was required to have a L-T Debt to Total Capital Ratio below 70%; that last year’s 25% increase in debt was for unspecified, general corporate purposes; and that it could not discuss how Sysco planned to meet its 2012-2014 balloon payments, but believed the company had sufficient resources to repay those debts.

- Note the significant difference between SYY’s L-T Debt to Equity Ratio and its L-T Debt to Total Capitalization Ratio.  The formula for the former is ($2.477B Debt / $3.450B Equity = 71.8%) while the latter is ($2.477B Debt / $3.450B Equity + $2.477B Debt = 41.8%).  Sysco’s 70% limit pertains to its 41.8% L-T Debt to Total Cap Ratio, not to its 71.8% L-T Debt to Equity Ratio.

- Industry Averages:

** With Hemscott-Morningstar data, SYY’s 71.2% Debt to Equity Ratio for 2009 was way, way above its adjusted Industry Average (Food Wholesale, 13 companies) of 49.8% when one atypical company is removed (VPS @ 169.5%).  Moreover, SYY was even well above its unadjusted Industry Average of 64.8%.

** With S&P data, SYY’s Debt to Capital Ratio was 41.8% for 2009 and averaged 36.9% for the last 5 years, both of which were above its Industry Average (Food Distribution, 16 companies) of 34.9%.

- The one-click Annual Report spreadsheet by Bob Adams: 

** The Long Term Debt to Equity Ratio from the latest A.R. was 72% and gets a red flag warning as it may be excessive.  The spreadsheet explains that a normal LT Debt/Equity Ratio should be under 25%; 

** LT Debt increased by 25% in 2008 which gets a caution flag as Debt/Equity is already high; 

** Total Interest Coverage [Pretax Profit + Total Interest Paid/Total Interest Paid] is 16.2% and is very good.

- Value Line:

** VL gave Sysco an A++, its highest grade, for Financial Strength;

** Total Debt was 42% of Capital and Total Interest Coverage was 17.5x as of 9-26-09;

** VL estimates that LT Debt will decrease from $2120.5M in 2009 to $1500M in the next 3-5 years, a 29% decline.

- Morningstar:

** The Morningstar narrative report said it was not concerned with the amount of SYY’s debt which, at the end of FY 2009, was 42% of Capital.  Earnings Before Interest and Taxes covered interest expense 16.1 times which was also emphasized in the webinar.

- Conclusion:

** I learned that Sysco’s Interest Coverage is good, but that the amount of its L-T Debt and its L-T Debt/Equity Ratio are not considered good.

** I also learned, by writing Investor Relations, that SYY is required to maintain a L-T Debt to Total Capital Ratio under 70%, which doesn’t seem demanding to me since SYY’s LT-Debt to Equity Ratio is very high.

** I was dissatisfied with SYY’s 10K Report which was unnecessarily vague about its debt requirements, why it increased its already high debt by 25% in 2009, and that it offered no discussion whatsoever about its very large balloon principal repayments in 2012-2014.

- The answer to whether Sysco has too much debt is, I think, a personal one: after assessing all the pros and cons, would you recommend against buying SYY stock because of its debt?  I know my answer, what’s yours??

Armin

please rate this post on the “mouse-over” star system below and/or leave a comment as your feedback is important to me.  I’m especially interested in what you think about Sysco’s debt (and my discussion of it).

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