Morgan Stanley Has Mixed Feelings On SYSCO

Morgan Stanley initiated coverage on SYSCO SYY with a $40 price target (5.8 percent upside) and Equal-weight rating.

One of the main concerns Morgan Stanley has regards the effectiveness of Sysco’s transformation: “The company's business initiatives seek to create the foundation for future growth and margin expansion. At the midpoint of company estimates, we calculate expected benefits can add over 100bps to FY15 operating margins; if Sysco is successful, these changes can be material given current margins in the 4-5% range.”

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Analyst Vincent Sinisi further commented on the merger with US Foods. Sinisi thinks the deal will add approximately $600 million in annual cost savings after a few years, leading to a $0.52 increase in EPS.

The $40 price target is based on 21 times forward PE, which is above the historical ratio.