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Sysco Hauls In a Buffet of Growth and Profits

Stocks in this article: SYY MCD YUM

NEW YORK (TheStreet) -- When "it's too loved and well-respected" is the worst thing you can say when debating whether to buy a company's stock, I take this as a clear sign that you've found a winner. And it's not often that I will say this; but under this scenario -- I believe near-term valuation fears should be overlooked.

So, while Sysco Foods (SYY) might have left the bargain bin on Monday following its 10% gain, investors that are still waiting on the sideline are fooling themselves thinking that this stock will ever get cheap -- not at the rate at which management is literally gobbling up the competition.

With Sysco having now hauled in more than a dozen deals this year alone that will yield a combined $1 billion in annual revenue, Monday's $3.5 billion deal for U.S. Foods continues what has been a key component of Sysco's long-term growth strategy and management's aggressive expansion plans. But Sysco's value has transcended its checkbook -- albeit, that, too has been impressive.

Equally impressive has been not only management's attention to detail, but also various business improvement initiatives they've come up with, like the company's recent enterprise resource planning application that has been deployed throughout the entire company. Although you wouldn't often associate a food distributor with cutting-edge software applications, management has spared no cost when looking for ways to squeeze extra profits out of better efficiency methods.

[Read: The Deal: Clayton Dubilier, KKR Sell U.S. Foods for $8.2B]

With that in mind, as a value investor that appreciates efficiency details and its impact on cash flow, it's fairly easy to see why this stock seldom gets cheap, especially in an industry that is already known for its thin margins. To that end, with U.S. Foods now coming on board in a transaction that will be immediately accretive to earnings, Sysco remains an attractive stock, given the $600 million it expects to save annually on a long-term basis.

Essentially, in this deal management has killed three birds with one stone. Not only does U.S. Foods present Sysco with an entry into new markets, but the deal will also boost the company's operational efficiency while also growing its cash pile.

This transaction, when combined with U.S. Food's debt, seems expensive at an enterprise value to $8.2 billion. But it is clear that Sysco is getting tremendous value and use out of its growing pile of cash. In that regard, I have to disagree with anyone who believes that Sysco overspent, especially when U.S. Foods is projected to expand Sysco's annual revenue to $65 billion.

The other thing to consider is, before this deal, Sysco had roughly 20% of the food distribution market. The company has now just acquired its closest rival, which had about 8% share. So given how well Sysco had performed, even during periods of weak restaurant traffic environment from top customers, like McDonald's (MCD) and Yum! Brands (YUM), things can only improve from this point forward, given its new leverage.

[Read: McDonald's Buy Recommendation Supported]

Don't confuse this for any sort of guarantee. As much as I like this company, by no means am I proclaiming it is flawless. And when considering that its growth relies on strong-performing restaurants, it does cause some nervousness, given that both McDonald's and Yum! have posted anything but strong results lately.

Even so, I just don't see a scenario where Americans will stop eating out. The fact is, it didn't happen at the height of the recession and it's certainly not going to happen today, given the dramatic improvements seen in the country's economy. Plus, it's certainly encouraging that Sysco has just grown its addressable market.

What this means is that, given Sysco's growing advantage over its rivals, even if restaurant traffic were to remain sluggish for an extended period of time, Sysco, by the strength of its infrastructure, should command the majority of that volume. And this deal, which should feed the Street's seemingly insatiable appetite for growth, just made an already-attractive company even more special.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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