Sysco Is a Solid Company but Be Cautious When Buying Its Shares

NEW YORK (TheStreet) -- Here's food for thought: Houston's Sysco (SYY) is the largest food-service distributor in North America, serving 425,000 customers products from seafood and dairy, to sanitation maintenance and glassware.

I believe Sysco is a very strong company but I have little insight into the current share prospects. Especially in the short term it can often be much easier to predict general business results rather than exact share price oscillations. Instead, I like to come up with a range of reasonableness to determine the present outlook for a firm.

Its shares recently traded near $37.75 and are up 4.6% for the year to date.

According to Morningstar analyst Erin Lash, since 1969 Sysco has acquired more than 150 companies or divisions of companies to expand its footprint, most recently a deal to acquire U.S. Foods, the second-largest player. It's clear that Sysco is growing via expansion. This latest addition would bump the company's combined control of the North American food-service distribution market up to 30% -- serving nearly one out of every three customers.

On the good yield front this is also relatively easy to observe. Sysco has a quarterly payout of 29 cents for an annualized yield of 3.1%, fully 1% higher than the average company.

Finally, it may or may not be true that shares are heading higher; it largely depends on the timeframe one is anticipating. As mentioned, I make no such claims as to having special insight in this area. However, we can look to history as a guide along with reasonable expectations moving forward. To illustrate this point, I will use the fundamentals analyzer software tool of F.A.S.T. Graphs.

Below I have included the 15-year chart of earnings and price correlation. Note that Sysco's operating earnings grew by about 7% per year, dividends increased steadily and shares generally traded at a bit of a premium with a normal P/E of 21.4 during this time.

Further, it's important to point out that shares were trading at about 40 times earnings at the beginning of this period as compared to a P/E ratio of about 21 today. As such, we can observe the corresponding performance results. While the business results increased by over 7% per year, the price only appreciated by about 3.5% during this time a direct result of the compressed price-to-earnings ratio. Interestingly, despite the low starting yield, Sysco still provided more income than the S&P 500 index.

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