Sysco Cooks Up a Storm of Interest

This column was originally published on RealMoney on Dec. 28 at 10:57 a.m. EST. It's being republished as a bonus for TheStreet.com readers.

Restaurants in your neighborhood may seem very different from one another, but they all may get their food from the same truck: one owned by Houston-based Sysco(SYY Quote). Think of Sysco as the supermarket where professional chefs go to shop. In the world of bringing food to restaurants, health care facilities, educational institutions and others, Sysco is king. It's been reported that its market share is 15%, vs. 10% for No. 2 U.S. Foodservice (part of Ahold(AHO Quote)), and 3% market share for No. 3 Performance Food Group(PFGC Quote). The Warren Buffett strategy I use likes dominant players, so it's no surprise that it has rated Sysco highly.

The food service industry is highly fragmented, and Sysco is becoming the behemoth of the group. Size has its advantages. Food service distribution has high fixed costs, so Sysco enjoys a competitive advantage from its economies of scale. Not surprisingly, given its size vs. its competitors, it can use acquisitions as a growth strategy. Consider its produce subsidiary, FreshPoint: By itself, it made five acquisitions in 2005. Also because of its size, Sysco is able to contract with food makers to develop products sold under the Sysco brand. About half of Sysco's sales come from its private-label products.

The company serves about 400,000 customers and its stock trades for about $31. Let's look at the reasons that Sysco whets the appetite of not only the Warren Buffett strategy, but also the James P. O'Shaughnessy strategy.

The Warren Buffett Strategy

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