Sysco Is Growing, But Showing A Mix Of Both Strengths And Weaknesses - Sysco (NYSE:SYY), Performance Food Gr (NYSE:PFGC)

A little more than two months ago, SYSCO Corporation SYY was pegged as a good rally candidate due to its rapidly growing earnings and it is surely an attractive prospect for further research. Strong growth of the Sysco is making many analysts keep an eye on its stock. Being at the heart of food and service, the leading U.S. food wholesales company serves more than 500,000 customers around the globe with its crew of 67,000 staff members. It is a global leader when it comes to sales, marketing and distribution to all sorts of establishments. And not forgetting their customers who prepare meals away from home.

New Cutting Edge Solutions

The company just announced the availability of nine new products exclusively for customers through its Cutting Edge Solutions platform. It is designed to enable its customers to succeed by differentiating themselves in an evolving and competitive business environment. The benefit of this platform is that it’s made from both market leading and up-and-coming players of the supply chain. It assists customers with refreshing their menus, driving increased traffic and streamlining back-of-house operations. Since it was launched in the fall of 2015, the platform resulted in 3.5 million innovative product offerings. The latest on-trend flavors and versatile product solutions include all-natural, chemical-free shrimp, antibiotic-free chicken and many trending ethnic flavours.

2019 Earnings

The company exceeded $60B in revenue for Fiscal Year 19. In August, it released its Q4 earnings report for the year ended on June 29, 2019. Its sales in the last quarter increased 1.0% to $15.5 billion. Consequently, gross profit and operating income increased, 2.1% and 5.4% respectively. The company saw improved year-over-year performance both in the quarter and the whole year. For 2019, cash flow from operations was $2.4 billion which is as much as $255.8 million higher than in fiscal 2018. Free cash flow for the fiscal year was $1.7 billion, which was $249.9 million higher compared to the prior year. But the less positive aspect comes after accounting for expenses as the company is not generating as much profit when compared to its industry peers.

The profitability ratio of Sysco is below the industry average as well as its net contribution percentage. The company is also not so efficient at product demand forecasting which resulted in higher rate of missed opportunities, again comparing to its competitors. With poor forecasting the company is ending up keeping higher inventory levels. The company has lost market share in the niche categories showing it was unable to tackle all the challenges brought on by new entrants so Sysco has to build a better feedback mechanism directly from its sales team on ground to counter these challenges.

Competitors – Large Players

The food service market is extremely competitive but strategic growth enables these companies to create greater scale, drive down costs, and improve profitability. Sysco already attempted to acquire its main rival, US Foods Holding Corp USFD’s service in 2013 but this idea was rejected by the Federal Trade Commission in 2015 so they purchased J Kings Food Service instead. US Foods who employs 42,000 less people was cleared by the Federal Trade Commission in September to purchase Services Group of America SGA’s Food Group of Companies, a leading foodservice distributor with a diverse customer base in the West and Northwest of the country.

The previously announced $1.8 billion cash acquisition was successfully completed. And there’s the Performance Food Group Co PFGC who announced the acquisition of Reinhart Foodservice. FTC has requested for supporting review information on October so PFG and Reinhart remain excited about the pending acquisition.

Competitors- Smaller Players

So, there are the above large public players, but there are also smaller ones like Jeronimo Martins, Gordon Food Service and Farmer Brothers. Gordon Food Service is perhaps the closest to Sysco as this private company also works within the Food Processing field. Gordon Food Service has 48,000 fewer employees than Sysco. Ben E Keith is also one of Sysco’s biggest rivals that generates $56.2B less revenue than Sysco. Sysco’s marketing leaves a lot to be desired, causing it to lose in niche categories from such small players as its unique selling proposition is not clearly defined.

Risks – Brexit and French "Yellow Vests" Included

There are general industry risks caused by interruption of supplies due to lack of long-term contracts, severe weather conditions that damage crops, intense competition, technology disruptions, dependence on large and long-term customers and other factors relating to foreign trade, that can increase costs. Risks and uncertainties also include the deteriorating global economy that could result in declined consumer spending. Expanding into international markets presents another set of challenges and risks, as besides compliance with local laws, regulations and customs, there’s the impact of Brexit and the “yellow vest” protests in France.

Perhaps the greatest weakness of Sysco is that the organizational structure is only compatible with the present business model thus limiting its expansion other segments. Also, compared to other industry players, Sysco spends a lot more resources when it comes to training its employees.

Outlook

As a whole, this company’s stock reflects both positive and negative signals as its financials show a combination of strengths and weaknesses. And there are challenges ahead if Sysco wants to maintain its market share, growth rate and enhance profitability by minimizing costs. Wall Street analysts have a somewhat mixed sentiment when it comes to the long-term outlook. Based on the price performance, this investment is somewhat risky but it does present reasonable potential for ROI. There could be a better investment than Sysco but it surely won’t be easy to find one.

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