Savoring Sysco (SYY)
April 21, 2010
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.” This slideshow could not be started. Try refreshing the page or viewing it in another browser.
Appraising Aeropostle (ARO)
April 9, 2010
Aeropostle (ARO) is a mall-based retail chain of specialty clothing stores that sells moderately priced apparel and accessories to teenagers. It operates 885 stores throughout the U.S. and 36 in Canada. A new initiative, P.S. from Aeropostle, targets children ages 7-12 with 14 stores currently and plans for 25 more this year.
Company Background:
– According to its latest Annual Report, ARO’s sales were up 19% in FY 2008, same-store sales increased by 8%, and EPS was up 28%. Young women accounted for 71% of sales.
– Morningstar reports that ARO differentiates itself from other teen retailers by selling similar clothes for less, often as much as half the price. The article also explained:
** While ARO did well during our current recession, it is likely to lose market share when the economy recovers and teens resume shopping at pricier stores like ANF and AEO.
** Other risks are selling fashion to fickle teens: some merchandising mistakes seem inevitable and financial results can be volatile.
** Morningstar estimates slightly more than 5% Sales growth over the long term with future growth likely to come from international expansion (as its domestic market is saturated) and from the new kids concept, P.S. from Aeropostle.
– ARO just completed FY 2009 and its press release described a very good year: Sales were up 18% and EPS increased 54%; e-commerce sales were up 48%; and the company had a 3 for 2 stock split effective 3-5-2010.
** In FY 2010, ARO plans to open 25 Aeropostle stores, 25-30 P.S. from Aeropostle stores, and to remodel some 40 existing stores.
SSG Discussion:
– I compared the SSG by BudS, which I got from BI’s First Cut page, with two of mine and with Take Stock.
** Armin-1 uses the identical judgments as Bud with one exception: I projected growth from the last quarter while Bud projected from the last FY. Armin-2 reflects my judgments totally, is much more conservative, and is still a SSG Buy.
Aeropostle (ARO) | BudS | Armin-1 | Armin-2 | Take Stock |
Date | 3-5 data 3-9 price | Same | Same | 3-20-10 |
Data | Hemscott-Morningstar | Same | Same | Same |
Price | $25.56 | Same | Same | $28.27 |
52 week High & Low Price | $29.90 & $14.62 | Same | Same | N/A |
Last Quarter of Reported Data | Q3 ending 10-31-09 | Same | Same | Same |
Software Used | TK 6 | Same | Same | TS Online |
Project Growth From End of | Last FY | Last Q | Last Q | Last FY |
Sales Growth | 15.00% | Same | 10.00% | 15.10% |
EPS Growth | 15.00% | Same | 10.00% | 15.10%initial 14.79% final |
High PE | 19.3 (5 year ave) | Same | 16.2 (from 2008) | 18.3 |
High EPS | $2.96 | $3.97 | $3.18 | $2.84 |
High Price | $57.10 | $65.90 | $51.50 | $53.89 |
Value Line Estimated High Price = $50-80 as of 2-5-10 | ||||
Low PE | 9.2 | Same | 10.6 (from 2008) | 7.4 |
Low EPS | $1.47 (last FY) | Same | $1.98 (ttm) | $1.64 |
Low Price | $14.40 (“other” option) | Same | $21.00 (low PE x low EPS) | $12.14 |
Upside/Down | 2.8 | 3.6 | 5.7 | 1.6 (imputed) |
Total Return | 17.4% | 20.9% | 15.0% | 13.8% |
SSG Buy Under | N/A | $30.13 | $25.60 | $22.55 |
RV/PRV | 87.8/76.4 | 87.8/79.8 (2008 low PE out) | Same | Not Used |
RV/PRV (no outs) | 87.8/76.4 | 84.9/77.2 | Same | Not Used |
Quality | N/A | TS = 7.9 | Same | Same |
PTPM – 5 yr ave | 13.0% Trend even | Same Same | Same Same | Same |
ROE – 5 yr ave Ending Year Equity | N/A | 39.7% Trend up | Same Same | Not Used |
ROE – 5 yr ave Beginning Yr Equity | 47.6% Trend up | Same Same | Same Same | 47.5% |
Debt to Equity – 5 yr ave | -0- Trend even | Same Same | Same Same | Not Used |
Bud’s SSG vs Armin-1
– The sole difference between Bud’s SSG and Armin-1 is that Bud projected future growth from the end of the last Fiscal Year while I projected from the end of the last quarter.
– All of our other judgments were identical and I made our current price the same.
– Bud got a 2.8 Upside/Downside while Armin-1 got a 3.6 U/D. That’s the difference between a SSG-Don’t-Buy (Bud) and a SSG Buy (Armin-1) as a minimum 3.0 is one of the required SSG Buy criteria.
Armin-2 vs Bud’s SSG
Estimating EPS:
– When I did my SSG, the seven analysts I always check for long-term EPS estimates were averaging 15.73% with Value Line high at 18.50% and S&P low at 12.80%. Without those extremes, the remaining five analysts were close and averaged 15.76%.
** Bud estimated 15.00% EPS which his First Cut write-up said was “conservative and realistic” and nothing more, but which is actually not “conservative” by comparison.
** For Armin-2, I decided to project 10.00% EPS growth based on the lowest of the 13 analysts at CNNMoney via FactSet CallStreet and the 12 at Reuters.com.
– For how I estimate EPS for all my SSGs, check out: Estimating EPS
Forecasting the High and Low PEs:
– Bud used 19.3 as his Forecast High PE, the 5-year historical average, whereas I used 16.2, from 2006 and the lowest High PE in the last 5 years.
– ARO’s 5.8 Low PE was atypically low in 2008 and I treated it as an outlier. For Armin-2, I used 10.6 as my Forecast Low PE (also from 2006) while Bud used 9.2 which he did not explain.
Forecasting the Low Price:
– Bud forecast $14.40 which, he wrote, was the lowest price in the past year, but his SSG shows that $12.20 was actually the low for 2007.
– Armin-2 used $21.20, the Low PE x Low EPS option, and the choice most appropriate for growth companies (BI/NAIC Stock Selection Handbook by Bonnie Biafore, page 108).
Final Results:
– Bud’s SSG did not satisfy the SSG Buy criteria which are a 3.0 Upside/Downside Ratio AND a 15.0% Total Return. Armin-1 and Armin-2 both resulted in a SSG Buy. Take Stock, like Bud, got a Don’t Buy
- Bud’s SSG got a 2.8 U/D and a 17.4% TR
- Armin-1 got a 3.6 U/D and a 20.9% TR
- Armin-2 got a 5.7 UD and a 15.0% TR
- Take Stock got a 1.6 U/D (imputed) and a 13.8% TR
Financial Condition
– Value Line reported no debt, $285.5 M in cash assets, and a Financial Strength rating of B++.
– Morningstar found ARO to be in good financial health with no debt and plenty of cash adequate to fund store expansion.
– The one-click Annual Report Analysis spreadsheet by Bob Adams gave ARO a 57 out of 100 (or 98 as two data items were missing) with 9 bullish and 8 bearish results:
** The bullish or good things include: no long-term debt, ROE is very good at 52.8%, and sales were up 18% and increasing faster than related costs.
** The bearish or not-so-goods include: inventories are increasing; free cash flow should be higher and gets a red-flag warning sign.
### You can get this free and easy-to-use spreadsheet, and a summary of its many features, by going to my Favorite Links page: click here.
Peers vs Competitors
– Peers are not competitors and, for sure, they are not close or direct competitors.
– The S&P data used by the Online SSG at the Better Investing website places ARO in the Women’s Clothing Store Industry and lists Reitmans (RET, Canada), The Dress Barn (DBRN) and The Cato Corp (CATO) as peers.
** Since ARO sells clothes to teenage young men and women, the Women’s Clothing Store Industry (and its three peers) seem like unsuitable comparisons;
** You can change these defaults to competitors, but you must first know what companies you want to switch to.
– YahooFinance places ARO in the All Apparel Stores Industry and lists American Eagle (AEO), The Gap (GPS) and Pacific Sunware (PSUN) as direct competitors.
– Morningstar places ARO in the Apparel Store Industry and list Abercrombie & Fitch (ANF), Zumiez (ZUMZ), AEO, and PSUN as close competitors.
Is ARO Better (or Worse) than its Competitors and/or its Industry Averages?
Comparisons using Hemscott-Morningstar Data:
– All four of the studies used Hemscott-Morningstar data which places ARO in the Apparel Store Industry (46 companies total):
** In terms of its Pre-Tax Profit Margin 5 year average, ARO is much better than its Industry Average (13.0% vs 8.0%)
** ARO’s 13.0% PTPM ranks #8 out of 46 companies and is better than three competitors (GPS #10.2%, ZUMZ @ 9.6% & PSUN @ 5.2%) and is not as good as two (AEO @ 18.7% & ANF @18.1%). ARO is also better than two peers (DRBN & CATO).
** In terms of its 5 year average Return On Equity, ARO is also better than its Industry Average (39.7% vs 30.1%). But, without JCG (680.1%) which is bizarre and a distorting outlier, ARO is much better than its Adjusted Industry Average (39.7% vs 13.9%).
Comparisons using S&P data:
– My S&P data subscription from BI places ARO in the Apparel Retail Industry.
** In terms of its Pre-Tax Profit Margin 5 year average, ARO is much better than its Industry Average (13.0% vs 7.4%).
** In terms of its 5 year average Return On Equity, ARO is also much better than its Industry Average (39.3% vs 25.9%).
## This Industry Average is also distorted by JCG’s bizarre ROE (488.3%), but there is no company-by-company listing, unlike the Morningstar-Hemscott data at Stockcentral.com, so I cannot adjust the Industry Average. [Kudos to Stockcentral for the best industry page on the web!!]
– I conclude that ARO is much better than its Industry Averages with Hemscott-Morningstar and also much better with S&P data, and is sometimes better and sometimes not as good as its direct or close competitors.
– For more on Investigating Industry Info, see: Investigating Industry Info
Armin