From an operational standpoint, the restaurant industry seems to be on the road to recovery. Companies like McDonald's (NYSE: MCD), Yum! Brands (NYSE: YUM) and Chipotle Mexican Grill (NYSE: CMG) are all seeing better traffic and lofty stock prices. The question, though, is whether food supply giant Sysco (NYSE: SYY) gets to share in the happy feelings.

IN PICTURES: 9 Simple Investing Ratios You Need To Know.

A Dog's Breakfast In The First Quarter
Sysco's fiscal first quarter report does not really seem good enough for a company whose stock is near a 52-week high. Revenue rose more than 7% to $9.8 billion, and it did beat the consensus estimate, but the quality of the beat may be a worry to some. Food cost inflation was 3.3% in the quarter, and acquisitions and forex chipped in another 1.1% of the revenue growth. Volume growth, then, was on the order of 3% - not bad, but probably not enough to really get investors or analysts excited.

Concerns about the company's margin performance are also likely. Gross margin has been a concern for some time, as the company has battled a tough pricing environment on both sides of its business. For this quarter, gross margin dropped 40 basis points to 18.8% - a number that is not likely to thrill those worried about this issue. A little further down the line, operating income growth of 2% is likewise not a real cause for celebration.

The Road Ahead
At this point, it is hard to find any real threat to Sysco beyond sustained mediocrity in growth. The company serves 40% of the U.S. food service industry, has more share than its next five competitors combined, and still has opportunity for expansion in both products and customers.

On the other hand, Sysco suffers from a long-term case of "It is what it is." YUM can carpet the developing world with its quick-service restaurants, and smaller chains like Chipotle and Buffalo Wild Wings (Nasdaq: BWLD) can deliver impressive growth by exploiting new niches in the restaurant market. Sysco simply cannot grow as fast and does not have the same sort of expansion options. There is no reason that Sysco cannot grow overseas, but it takes time and money to build the networks and relationships.

The Bottom Line
Sysco is not a bad company; far from it, in fact. A double-digit return on invested capital and a commanding share in a growth industry are two of the best indicators of good companies over the long term. That said, investors have to buy this stock right, because there is no falling back on good growth and earnings momentum to ease that mistake. (For more, see The Characteristics Of A Successful Company.)

To that end, Sysco just does not look compelling today. The company has a consistent record of mid-single-digit growth and low/mid-single-digit cash flow margins. It is hard to see what the company could, or would, do to change that. The best guess here is that there will be some consistent improvement in cash flow generation, but not enough to fuel a dynamic price target. Accordingly, it would seem that a pullback of at least 10% would be in order before the stock would be intriguing. (For more, see The Value Investor's Handbook.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  7. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  8. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  9. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
  10. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
Trading Center