Sysco: Food for Thought

02/24/2006 12:00 am EST

Focus:

Kelley Wright

Managing Editor, Investment Quality Trends

Using a proprietary system that determines under- and over-valuation based on a stock’s historic level of dividend yield, IQ Trends has developed one of the industry’s most consistent success records. Here, Kelley Wright offers some "food for thought."

"With about 390,000 customers, Sysco (SYY NYSE) is the largest marketer and distributor of foodservice products in the US and Canada. Named as an acronym for ‘Systems and Services Company,’ Sysco counts among its customers cruise ships, sports parks, hotels, hospitals, colleges, nursing homes, and restaurants.

"Its foodservice product catalog is enormous, with five major brandings: Sysco Supreme is reserved for top-line products which are difficult to obtain, and in most cases not available from competitors. Sysco Imperial is high quality standard offerings. Sysco Classic is the company’s largest selling label and Sysco Reliance is an economy brand.

"With its wide offerings of food and related items, Sysco remains a key ingredient to the success of many restaurants. The company maintains a full line of frozen and dry goods. Fresh products include meats, side dishes, soups, entrees, desserts, fresh dairy products, beverages, condiments, and salads. Specialty products offers custom-cut steaks, poultry, and seafood.

"Sysco’s bakery operations sell doughs, rolls, and breads as well as spices and cooking oils. Sysco’s lodging unit provides room accessories, housekeeping supplies, towels, and other amenities to the lodging industry. To the medical industry, SYY offers medical and surgical supplies. Sysco also provides disposable paper products such as plates, napkins, and cups to a variety of customers.

"The close of the second quarter brought disappointing news of a profit decrease for shareholders. At the end of January, the company reported that sales during the second quarter increased 7.5%, but profits fell from the $0.36 a share realized during 2004 to only $0.33 a share. Earnings per share came in at $0.64, down 10% from the $0.70 realized in 2004. Results were hurt by operating expenses, and accounting rule changes which factored costs for stock-based compensation.

"At a recent price of $30, Sysco is 'Undervalued,' with a yield of 2.3%. From current levels the stock has an about 224% upside potential to an 'Overvalued' price of $97, where its historic low yield is 0.7%. In addition to having an A+ quality ranking, the company is among our very best in terms of frequent dividend increase. Sysco also maintains low debt, a reasonable payout ratio, and is trading at or near its 52-wk low levels. Investors should find purchase rewarding up to prices of $37.50."

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