Sysco (NYSE:SYY) is the nation’s largest food logistics and supply chain company. In other words, it delivers food and supplies to millions of restaurants, school and hospital kitchens, corporate offices, and so on. The company has used its tremendous size to create a competitive advantage, enabling its shareholders to generate significant profits. From the financial crisis to its pre-coronavirus peak. SYY stock quadrupled
In the last 30 years, Sysco’s shares have kept shareholders well-fed; the stock is up more than 1,000% since 1990, including the recent crash. However, the shares briefly lost more than half of their value during the stock market mayhem earlier this year, and uncertainty about them remains high. What makes the company stand out, and will it get back to its old heights in the coming months?
Sysco’s Secret Sauce
Sysco is not a high profit-margin business. In recent years, it has pulled in about 4.5 cents of operating profit for every dollar of revenues it generates. Where Sysco makes its money is on high transaction volume. Last year, it reported more than $50 billion of revenue, slightly outpacing even McDonald’s (NYSE:MCD) franchise-wide sales.
Needless to say, Sysco has incredible bargaining power, and it can squeeze the last dime out of its various suppliers. If Sysco’s suppliers say “no” to it, after all, a huge chunk of their business will disappear. Sysco has built stable customer relationships over the decades and has now established a hard-to-disrupt business. Importantly, Sysco has hiked its annual dividend payout for 50 years in a row, showing the stability of its core business model.
Sysco Was in Transition Before the Pandemic
While the pandemic has been the obvious source of weakness for Sysco, that’s not the only issue it’s facing. In recent years, Sysco’s operating margins have slipped. A combination of inflation and loss of share in the restaurant space caused Sysco’s results to take a hit.
Before the pandemic, Sysco had already taken steps to address that issue. For example, it brought in a new CEO to try to get its profitability back up to its previous level. In February, the company appointed Kevin Hourican as its CEO. Hourican previously oversaw CVS Health’s (NYSE:CVS) retail pharmacies.
The pandemic has given Hourican free rein to completely shake things up at Sysco, and the current economic crisis gives him even more room to maneuver.
Furthermore, in 2017, the company made a significant acquisition in Europe, taking the firm away from its traditional focus on the North American market. We’ll see if Hourican moves into more overseas markets or if he doubles down on Sysco’s core market where it has higher profit margins and a greater competitive advantage.
Sysco also has a relatively high amount of debt. Moody’s downgraded Sysco’s debt to Baa1 this March. That’s still a solid, investment-grade rating, but its balance sheet is far from pristine. Given its falling credit rating and the severe shock to the national food supply chain, investors’ decision to dump Sysco’s shares back in March is understandable.
How Long Will Sysco’s Shares Stay Depressed?
For the quarter that ended in March, Sysco’s revenues dropped 6% year-over-year. However, management noted that its sales sharply decelerated in March and that its results could weaken going forward. As a result, the company is cutting its costs by more than $500 million per quarter until its business improves.
Still, its business could be rocky for awhile. Last quarter, its earnings and net income plunged around 40% each. Given the large size of its business , even a small revenue decline can utterly crush its profit. As a result, until the economy reopens fully, Sysco could report surprisingly weak results. That should offer investors some good opportunities to get into the stock on weakness in the coming months.
The Verdict on SYY Stock
Sysco has a few problems. The virus is an obvious issue that has caused many of its key customers to be out of commission for the foreseeable future. A number of its former customers — including many restaurants — will never reopen. The losses of those customers have taken a big chunk out of Sysco’s bottom line.
The company had a few operational missteps as well that had nothing to do with the pandemic. However, Sysco has hired a new CEO who appears capable of fixing these issues. That said, until he delivers concrete improvements, the market may remain skeptical of the stock.
However, it’s easy to argue that the market has overreacted. Sysco’s shares are still down nearly 40% from their pre-virus highs, after all. In the meantime, shareholders can enjoy the stock’s 3.4% dividend yield. As I mentioned, the company is a perennial dividend growth play, with a string of dividend hikes running back half a century. And with the recent share price decline, Sysco now offers an appetizing 3.3% dividend yield.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.
