A Member of Pat McKeough’s Inner Circle recently asked for his advice on a food products company that supplies restaurants, schools, health-care facilities, and lodging establishments.
Pat likes the strong balance sheet and 2.3% yield. However, he notes that revenues were significantly impacted by the pandemic and the company has been expanding via acquisitions in recent years.
Q: Can I get TSI’s view on Sysco as a stock to buy? Thanks.
Sysco Corporation (Symbol SYY on New York; www.sysco.com), is the largest global distributor of food products to restaurants, schools, health-care facilities, and lodging establishments.
With approximately 57,000 employees, the company operates about 330 distribution facilities worldwide and serves more than 625,000 customer locations. Its primary operations are located across North America and Europe, with headquarters in Houston, Texas.
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Sysco’s product line includes frozen, canned and dry foods; fresh meats, seafood and produce; dairy products; beverages; and a variety of non-food items, including tableware, cookware, restaurant equipment and cleaning supplies.
Of the company’s total revenue, restaurants contributed approximately 62% of sales; health-care facilities, 9%; schools and government, 8%; the travel industry, 7%; and all other customer types, 14% of sales.
Sysco has expanded its business through acquisitions over the last few years. For example, in 2018, the company completed several purchases. They include HFM Foodservice (HFM), a Hawaii-based distributor with approximately $290 million in annual sales, and Doerle Food Services (Doerle), a Louisiana distributor with roughly $250 million in annual sales.
That same year, the company also made international purchases: it acquired Kent Frozen Foods (KFF), a U.K.-based distributor to the catering industry, and EkoFagel, Fisk & Mittemellan, a leading fresh fish preparation and distribution business in Stockholm, Sweden.
In 2019, Sysco then bought Waugh Foods, Inc., an Illinois distributor with approximately $40 million in annual sales, along with J&M Wholesale Meats and Imperio Foods, Inc.
In August of 2019, the company also acquired J. Kings Food Service Professionals, a distributor with approximately $150 million in annual sales. Sysco also acquired Armstrong Produce and Kula Produce in November of 2019. These two companies are Hawaii-based fresh produce wholesalers and distributors with over $150 million in combined annual revenue. The acquisitions will become part of Sysco’s specialty produce unit.
Meanwhile, in August of this year, Sysco sold CAKE, a Point-of-Sale (POS) solution provider serving more than 5,000 restaurant locations. The sale will generate extra cash and will let the company focus on other new initiatives. Sysco has yet to reveal the selling price for CAKE.
The company’s strategy of expansion through acquisitions adds some risk but has helped generate steady growth. Overall sales rose 9.9%, from $50.4 billion in fiscal 2016 (fiscal years end June 30) to $55.4 billion in 2017. Sales then increased 6.1% in 2018, rising to $58.7 billion. Sales gained 2.4% in 2019 to $60.1 billion, then fell 12.0% to $52.9 billion in fiscal 2020, due to the impact of COVID-19.
Overall earnings rose 14.4%, to $1.4 billion ($2.50 a share) in 2017 from $1.2 billion ($2.07 a share) in 2016. Earnings then climbed to $1.7 billion ($3.17 a share) in 2018, and $1.9 billion ($3.59 a share) in 2019. However, earnings declined to $1.0 billion ($2.02 a share) in 2020 due to the pandemic’s impact on sales.
The closure of restaurants and restrictions on travel due to COVID-19 have greatly reduced Sysco’s sales and earnings. That’s because sales to restaurants and the travel industry usually generate about 70% of revenue.
To offset these losses, the company has created new sources of revenue and has undertaken cost-cutting measures. Part of that is acting as a product and logistics provider to retail grocers and supporting small restaurants with delivery/pickup services. In addition, Sysco is acting as a distributor of cleaning supplies. It has also identified and implemented actions to cut $350 million in annual costs.
As well, in June 2020, the company launched its Restaurant Readiness Tool, a first-of-its kind simulation that provides an easy-to-use comprehensive view of the best practices and essential supplies that operators need for re-opening their restaurants after tight pandemic lockdowns.
With its strong balance sheet and cost-cutting measures, Sysco should be able to weather the pandemic. However, while trends are improving, social-distancing measures will likely continue to hurt its customers—most notably restaurants and hotels—for some time.
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