Sysco Is Hot -- but It Might Burn Investors

Year to date, shares of food service distributor Sysco (SYY) are up 34%. Can Sysco keep cooking?

In July 2016, Sysco completed the acquisition of European foodservice distributor Brakes for $3.1 billion, including $2.3 billion in debt. The deal allows Sysco to continue with its overseas expansion. After its plans to acquire rival US Foods were halted by antitrust regulators, the company decided to acquire Brakes.

On Nov. 7, Sysco reported first-quarter fiscal 2017 results. Sysco posted earnings of 67 cents per share, 9 cents better than the consensus estimate of 58 cents. Revenue rose 11.2% to $13.97 billion, vs. the $13.89 billion estimate. Excluding the Brakes acquisition, revenue rose 1% to $12.7 billion.

Gross margin increased 124 basis points to 19.3%. Excluding Brakes, gross profit increased 5% to $2.3 billion and gross margin rose 70 basis points to 18.5%.

International food sales were $2.7 billion, while U.S. sales were $9.5 billion, up 0.8%. Sales to independent restaurants grew by 1.9%.

Management announced it would lay off 1,2000 employees amid weak consumer spending in the restaurant industry. The company said consumers are eating out less and buying more groceries. The layoffs should help the company to boost operating income by at least $500 million, or 28%, by the end of 2018.

This is a tough one.

On one hand, Sysco keeps expanding and driving margins, but on the other, weak consumer spending and a high valuation keep me out of the stock. At the current price, the stock is trading at 19.7 times the consensus forward estimate of $2.69 per share and over 18 times the fiscal 2019 estimate of $2.80.

To me, Sysco just doesn't deliver enough organic top-line growth to get me to buy the stock. I would stay out.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

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