ModernGraham Valuation: Sysco Corp (SYY)

moneyCompany Profile (obtained from Google Finance): Sysco Corporation (Sysco), along with its subsidiaries and divisions, is a North American distributor of food and related products primarily to the foodservice or food-away-from-home industry. The Company provides products and related services to approximately 425,000 customers, including restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Sysco provides food and related products to the foodservice or food-away-from-home industry. The Company has aggregated its operating companies into a number of segments, of which only Broadline and SYGMA are the main segments. Broadline operating companies distribute a line of food products and a variety of non-food products to their customers. SYGMA operating companies distribute a line of food products and a variety of non-food products to chain restaurant customer locations. On October 3, 2012, the Company acquired Keelings Foods.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $15.38
MG Opinion Overvalued
Value Based on 3% Growth $26.14
Value Based on 0% Growth $15.32
Market Implied Growth Rate 5.83%
Net Current Asset Value (NCAV) -$2.22
PEmg 20.16
Current Ratio 1.68
PB Ratio 4.06

Balance Sheet – 9/30/2013 

Current Assets $6,534,300,000
Current Liabilities $3,883,700,000
Total Debt $2,878,400,000
Total Assets $13,025,400,000
Intangible Assets $2,108,600,000
Total Liabilities $7,826,300,000
Outstanding Shares 581,210,000

Earnings Per Share

2014 (estimate) $1.75
2013 $1.67
2012 $1.90
2011 $1.96
2010 $1.99
2009 $1.77
2008 $1.81
2007 $1.60
2006 $1.35
2005 $1.47
2004 $1.37
2003 $1.18

Earnings Per Share – ModernGraham 

2014 (estimate) $1.80
2013 $1.84
2012 $1.91
2011 $1.89
2010 $1.80
2009 $1.67

Conclusion:

Sysco Corp is a very intriguing company to the Enterprising Investor, but not the Defensive Investor.  The company’s lack of earnings growth over the ten year period along with its high PEmg and PB ratios and its low current ratio disqualify it from suitability for the Defensive Investor.  The Enterprising Investor’s requirements are all satisfied, however, so that investor type should feel comfortable proceeding with further research, beginning with a comparison to some other Enterprising Investor companies.  From a valuation standpoint, the company has not had sufficient growth in its earnings, with EPSmg (normalized earnings) only growing from $1.67 in 2009 to an estimated $1.80 for 2014.  The market is currently implying a growth rate of 5.83%, which is higher than the historical performance supports.  As a result, the company appears to be overvalued.

What do you think?  Do you agree that Sysco Corp is overvalued?  What would be your assessment?  Is the company suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Sysco Corp (SYY) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill


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