Foodservices giant Sysco (SYY) fetches a premium multiple. Given the prospects, in my opinion, that valuation is warranted. Buy Sysco shares on pullbacks, writes Jon Markman.
From avocado toast to specialty coffees, millennials love hospitality. Frequenting trendy restaurants and haughty coffee shops has become the new clubbing.
Business Insider reports Bernstein Research analysts have run the numbers. The implications for commerce are game-changing.
It’s an important trend investors should be playing.
Millennials are notoriously fickle, often flatly rebuking the preferences of their parents. Yet, trying to make sense of what persons born between 1981 and the middle 2000s value is more important than ever.
So-called Generation Y is about to surpass baby boomers in spending power. And Bernstein researchers found one thing is becoming clearer: Millennials value convenience.
Despite working fewer hours than their parents, Generation Y spends less time on food preparation, Bernstein analysts found. This has manifested most directly in eating out. Millennials, more than any generation before them, are more likely to value eating at restaurants.
To be sure, much of the attraction is pure convenience.
In 2015, The New York Times reported 40% of millennials stopped eating cereal because they dreaded the prospect of the dirty bowl left behind. That shift in behavior has been devastating for the cereal and soup businesses.
Shareholders for General Mills (GIS) and Campbell Soup (CPB) know this firsthand. The stocks have sloped lower, following declining sales.
Related story: Estee Lauder Grows Sales Unlike These Other Iconic Brands
"
Feast on this: There’s an Instagram account dedicated to photos of avocado toast.
However, being a foodie is a thing, too. Young people are more likely to congregate at preferred eateries than bars.
Yelp (YELP) reviews and snapping Instagram (FB) pictures of the delicious food they are about to eat has moved from the fringe to the center of their culture.
Sysco Corp. (SYY) is a smart way to play this trend. The Houston company has a history of getting big shifts right. And this one has the makings of the whole enchilada …
That’s a good thing, because Sysco has made a huge business out of supplying restaurants all over the world with fresh meat, fruits and vegetables, frozen items, seafood, poultry, beverages and desserts. It even supplies paper napkins, plates, utensils, china and flatware.
If you run a restaurant, you know Sysco.
The company has 500,000 clients worldwide and operates 300 distribution facilities in 90 countries. Yet, it is the kind of hidden gem investors often overlook, or worse, get confused with soundalike Cisco Systems (CSCO) — the networking business.
What makes Sysco attractive is scale. Company managers have leveraged its size and the strength of its supply chain to pummel competitors. Very often, those challengers are smaller regional businesses. When it comes to price, usually the leading determinant in the razor-thin restaurant business, it is a wholly unfair fight.
Sysco can offer the best prices because it is the largest foodservices business in most of the markets it serves. In the U.S., case volumes have increased year-over-year for 16 consecutive quarters.
In 2017, sales grew 10%, to a staggering $55.4 billion. And net income grew 17%, to $2.4 billion, even as the company booked $2.1 billion in free cash flow.
Now the company wants to get even bigger, while maintaining a minimum earnings threshold of $600 million to $650 million per quarter.
Following the release of third quarter financial results, Thomas Bene, the chief executive officer since 2013, told analysts Sysco closed the acquisitions of HFM FoodService, Kent Foods and Doerle Food Service.
These acquisitions follow previous buyouts of Brakes Group (a London-based food supplier), Supplies on the Fly, North Star Seafood, and Gilchrist and Soames. Plus, the company has made strategic investments in Mayca Distribuidores and Pacific Star Foodservice.
All of these businesses are being modernized with new technology. And they’re all folded into the larger Sysco platform to wring out efficiencies in the supply chain.
It’s a winning strategy that bodes very well for the future.
That future is even brighter because the culture is changing. More people are frequenting restaurants, Sysco’s core business.
Company shares are up 12.8% in 2018, and an average of 24% annually over the past three years. With a price-to-earnings ratio of 27.9, and a market capitalization of $35.3 billion, Sysco’s business fetches a premium multiple.
Given the prospects, in my opinion, that valuation is warranted. Buy Sysco shares on pullbacks.
Best wishes,
Jon D. Markman
P.S. One restaurant that’s cashing in on millennials’ appetite for food they don’t have to cook is Domino’s (DPZ). They combined Gen Y’s favorite meal with something else they love — digital technology. The results have been positively mouth-watering for shareholders.
Feast on this: My Power Elite members are sitting on a fat 57% gain in DPZ shares since we launched that newsletter one year ago. And we’re cooking up plenty more hot profits where those came from. We’re sitting on a bunch more open gains to the tune of 35.2%, 32.3%, 26.9%, 26.2% and more. Get on the list to receive my next Power pick — click here to get started.
Subscribe to Jon Markman’s Power Elite newsletter here
Subscribe to Jon Markman’s Tech Trend Trader here
Subscribe to Jon Markman’s Strategic Advantage here
