Sysco Corporation Quarterly Valuation – July 2014 $SYY

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Sysco Corporation (SYY) fares in the ModernGraham valuation model.

Company 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. SYY Chart

SYY data by YCharts

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 = 4/5

  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 – FAIL
  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

Key Data:

Recent Price $37.16
MG Value $16.95
MG Opinion Overvalued
Value Based on 3% Growth $26.72
Value Based on 0% Growth $15.66
Market Implied Growth Rate 5.83%
Net Current Asset Value (NCAV) -$2.17
PEmg 20.17
Current Ratio 1.68
PB Ratio 4.15

Balance Sheet – 3/29/2014

Current Assets $6,639,500,000
Current Liabilities $3,944,000,000
Total Debt $2,986,200,000
Total Assets $13,138,300,000
Intangible Assets $2,118,100,000
Total Liabilities $7,906,900,000
Outstanding Shares 583,940,000

Earnings Per Share

2014 (estimate) $1.87
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

Earnings Per Share – ModernGraham

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


Dividend History
SYY Dividend Chart

SYY Dividend data by YCharts

Conclusion:

Sysco Corporation qualifies for the Enterprising Investor but not the Defensive Investor. The Defensive Investor has concerns with the low current ratio, lack of sufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor’s only major concern is the high level of debt relative to the net current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.80 in 2010 to only an estimated $1.84 in 2014. This level of demonstrated growth supports the market’s implied estimate of 5.83% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out the previous ModernGraham valuations of Sysco Corporation (SYY) for more perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Sysco Corporation (SYY)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Sysco Corporation (SYY) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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