Sysco Stock Is Still a Gamble Until Pandemic Concerns Dissipate

Seven months ago, Sysco (NYSE:SYY) was a solid investment. SYY stock had posted a decade of sustained growth, and last December closed at $85.80, an all-time record high. The company was also a dividends champ. Then, the novel coronavirus pandemic derailed Sysco, as it did most stocks. However, the stock has been slower to recover than many. Currently trading around the $54 level, it’s still down 37% from its December 2019 levels.

SYY Stock Is Still a Gamble Until Pandemic Concerns Dissipate

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So does that makes Sysco’s stock a buy? 

I think it’s pretty risky, and I’ll explain why in a moment. SYY stock currently has a C-Rating in my Portfolio Grader, although it does maintain its A-Rating in my Dividend Grader. 

The Pandemic Decimated the Restaurant Sector

Sysco’s business is focused on the food service industry. The company sells and distributes food and food preparation equipment to restaurants, as well as hospitals, nursing homes, schools, military bases and hotels. If you happen to be up at the crack of dawn and walking through an urban center, you’ll see the Sysco trucks rumbling from restaurant to restaurant.

At least you did prior to the arrival of the coronavirus pandemic.

With the coronavirus lockdown, restaurants were forced to shut their dining rooms. Those that could pivoted to takeout, but that volume couldn’t match their normal level of business. That meant orders for food and equipment from Sysco took a hit.

In its third-quarter fiscal 2020 earnings report (released on May 5) Sysco showed the damage to its business. Sales of $13.7 billion for the quarter were down 6.5% year-over-year. Analysts had been looking for earnings per share of 84 cents, but instead the company reported EPS of 45 cents. Not just a miss, but down significantly from the 79 cents per share posted a year ago.

How bad has the pandemic been? Sysco included this introduction in its earnings press release: “Over the last 50 years, Sysco has weathered its share of exogenous shocks and economic crises, and each time Sysco has remained a resolute foodservice industry leader. The extent of the COVID-19 crisis is more substantial than any other throughout the company’s history.”

So it was good news for Sysco that states have begun reopening restaurants. Or is it?

Restaurants are Re-Closing

The reopening of restaurants across the U.S. has not gone well. Covid-19 cases are on the rise, there are battles over wearing masks, and many restaurants that had reopened in recent weeks are now closing again.

Patio dining is a lifeline to some — offering an opportunity for social distancing and fresh air — but that only works during good weather. And what happens in the winter?

A Coronavirus Vaccine Is Key

There are many industries that are desperately waiting for the arrival of a coronavirus vaccine. Airlines, hotels and cruise lines are in big trouble until people can safely travel once again. The biotech industry is all hands on deck, racing to develop a vaccine.

The restaurant industry is also hurting and in a position where business won’t return to any semblance of normalcy until a vaccine is available. While fast food chains are faring better thanks to their focus on takeout, the industry has been devastated. As of the end of March, an estimated 30,000 U.S. restaurants had closed permanently. That number is projected to soon pass 110,000, according to the National Restaurant Association. 

The coronavirus pandemic has hammered restaurant stocks, even the fast food giants that are less impacted by the closure of dining rooms. McDonald’s (NYSE:MCD) is still down 7.3% for 2020. Pizza Hut and Taco Bell owner Yum! Brands (NYSE:YUM) is down nearly 14%. Cheesecake Factory (NASDAQ:CAKE), which was built around casual in-restaurant dining, has seen its shares lose over 43% of their value so far this year.

SYY stock has reflected the doom and gloom surrounding its key customer base, shedding 34% of its value since the start of the year.

Bottom Line on SYY Stock

Sysco is a gamble at this point. On the plus side, you have a company that dominates its industry. It has seen its shares steadily gain in value over the past decade, and it’s a solid performer on the dividend front.

Even during the worst of the coronavirus pandemic, it still had customers like hospitals and military bases that require restocking. Its fast-food customers have been more resilient than others. And Sysco has operations in other countries that are in more advanced stages of pandemic recovery.

However, there is a real risk that the U.S. restaurant industry — Sysco’s core business — is going to be hit even worse than it has been. The U.S. is setting daily coronavirus infection records, and some restaurants that had reopened have been closing down again. Many of these may never reopen again, even if a vaccine is found. That gloomy prognosis makes me wary of SYY stock at this point. It may yet recover, but I think even in a best case scenario the path back to its 2019 levels is going to be a long one.

Louis Navellier had an unconventional start, as a grad student who accidentally built a market-beating stock system — with returns rivaling even Warren Buffett. In his latest feat, Louis discovered the “Master Key” to profiting from the biggest tech revolution of this (or any) generation. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters. 

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