Stay Put Sysco Investors, Trian Is Now In 'Data Gathering Mode'

• The share price of SYSCO Corporation SYY has increased 11.49 percent over the last three months, from the low of $35.78 on July 27.
• Jefferies’ Mark Wiltamuth has maintained a Hold rating on the company, with a price target of $42.
• Wiltamuth explained that while activist Trian seemed to be in a “data gathering mode,” the Hold rating was being maintained due to lack of confidence in the company’s being able to achieve its goals.

Analyst Mark Wiltamuth reported that during a recent meeting with Sysco’s CEO, CFO and VP of IR, management “reiterated plans for $400M op. income growth and 15 percent ROIC by F18.”

Wiltamuth believes that for the company to be able to meet its targets, it would need to deliver case volume growth of 2-3 percent from locally managed account, as compared to the flat volumes seen over the last five years, while keeping gross margins stable.

Sysco’s locally managed business accounts for 65 percent of the company’s revenues. “While management is optimistic, market share is already 20 percent here, and it could be hard to grow share; we believe improvement in restaurant demand may be required to hit targets,” Wiltamuth stated.

On the other hand, given that gross income is expected to grow 4 percent, expenses would increase by 3 percent, which would lead to operating margin expansion and EBIT growth of 7 percent.

“Gross margins have been a problem area for SYY. The company has lost 170bps of gross margin since 2010,” the RBC Capital report said.

In addition, with food prices falling, the company’s sales are likely to be pressured, while expenses grow. Sysco could face earnings headwinds due to these lower prices.

The EPS estimate for Q1 has been reduced from $0.52 to $0.50.