Sysco: Another Tale of Two Industries.

It was the best of industries, it was the worst of industries.

Consumer staples and logistics. That is one of the most defensive sectors paired with one of the most cyclical. Who would’ve thought such a pair would interact so well?

You may be asking, “In a time of such uncertainty, where should we turn to protect our portfolios?”

I’ll tell you, no matter how bad the economic outlook gets, people still have to eat. With that in mind, you should take a look at Sysco as a safe-haven investment.

Sysco Corporation (NYSE: SYY) is the world’s largest food distributor that services over 400,000 clients which include educational facilities, restaurants, hotels, and health care facilities. They operate in 90 countries through 194 distribution centers.

Sysco makes its money by offering a wide variety of food, non-food, and specialty items through three segments. Its Broadline segment is the company’s largest and accounts for nearly 80% of total revenue. However, its “Other” segment has hit a growth spurt. This segment handles all of the specialty produce, custom-cut meats, Asian cuisine, and lodging industry.

As we pointed out earlier, Sysco mingles in two sectors- consumer staples and logistics. I guess you could say that its “bisectoral.”

This is very advantageous for Sysco. The ability to deliver their products allows them to supply not only high-end restaurants, but service the growth of up-and-coming restaurants as well. If an economic slowdown rears its ugly head, like I said before, people still have to eat. This gives the company a buffer of sorts.

Now, I know what you’re thinking. “If the economy takes a downturn, people will be less likely to eat out at restaurants.” Well, the data says otherwise.

Over the past 15 years, consumer spending on the restaurant services portion of their budgets has grown from 33% to 55%. When looking at what happened during the 2008 financial crisis, restaurant spending actually increased. The only shift seen was from higher-end restaurants to more affordable, fast-food style options.

This is promising when looking at Sysco’s size and footprint. It has the largest food distributor presence in every country it operates in. This implies serious resilience.

Between 2008 and 2009, Sysco saw its revenue fall by $1 billion, or nearly 3%. This number, though seemingly high, would have been a dream come true for most companies during the crisis. By 2010, their revenue had returned to levels seen before the recession. Sysco is padded from economic mishaps and has the capability of quickly bouncing back to its former glory.

Sysco is in a very competitive industry. The top 25 companies were able to capture 99% of the industry growth between 2003 and 2015. This has taken them from controlling 35% of the market share to 65%. By 2020, it is estimated that the top 50 companies will control 80% of the industry!

This is due to the relatively small barriers of entry in the food industry. However, over the years we’ve seen a lot of the smaller companies either close up shop or get bought out. Sysco has been a big driver of acquisitions, buying out 95 other companies.

Not only has Sysco expanded its footprint through acquisitions, but they also coordinate with local farmers and producers not in their supply chain to ensure their customers have everything they need. This includes not only fresh fruits and vegetables, but specialty meats and non-food products as well. This helps develop relationships and, in turn, gain market share.

To help win over the public, Sysco has been gaining market share through sustainable means. In 2007, they made all of their sustainability efforts available to the public. They purchase all of their products through sustainable, cruel-free means. Their efforts have been so successful that they have set a new trend in the sector.

Sysco is also adapting to consumer preferences ahead of both its customers and competitors. As consumers began to demand healthier options, Sysco rolled out its web-based eNutrition tool. This allows Sysco’s customers to analyze the nutritional information of their products. They can then be tailored to fit the needs and demands of consumers.

In the food distribution industry, margins are relatively low. To combat this, Sysco has been looking to cut costs wherever it can.

They’ve also tried to streamline their operations. Sysco cross-trained key employees so it was able to eliminate 1,200 administrative positions, around 2% of its workforce, earlier this year. Management expects these changes to raise its operating income by at least $500 million by 2018. This would result in margins jumping from just over 1.5% to 2.5%.

Sysco also owns most of its distribution capacity. For example, they own 95% of their 9,600 vehicles and trucks used for distribution. Out of the 194 distribution centers, which total over 22 million square footage of space, they own over 80%. This ownership is another way that costs are kept in check. It also provides added tax benefits of claiming depreciation.

Another way to become more profitable is to scale up operations. Even though the company already operates in 90 countries, they’ve taken advantage of the strong dollar to make infrastructure upgrades internationally. This increased production capacity should be adequate in combating less-than-favorable currency swings.

Now, believe it or not, but upon writing this, Sysco was trading at $47 per share. Taking all of their efforts, competitive advantages, and fundamentals into account, we estimated a fair value of $56, an undervaluation of 16%. Leading up to their September earnings announcement, the company saw a lot of favorable analyst revisions.

They ended up smashing earnings estimates by over 13%. Then, the price jumped and continued to climb, hitting our price target within the past week or so. Since then, we’ve revised our fair value estimates to $61, giving it 10% more wiggle room.

Now even though all of the other analysts were playing a game of catch-up, they eventually realized the golden rule- “People gotta eat!” For that reason, consider loading up your plate with Sysco.

After all, it is the age of consumer staples; it is the age of logistics.

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