Food distributor Sysco (NYSE:SYY) is never flashy, but the company has an enviable track record of market share growth and consistent free cash flow growth. That makes it a staple name on lists of quality dividend growth stocks and conservative growth ideas. What's more, it is not a bad way to play what could prove to be many years of inflation pressure. (To help you build a dividend portfolio, read Build A Dividend Portfolio That Grows With You.)

TUTORIAL: Stocks Basics

Solid Third Quarter Performance
Sysco reported sales growth of just over 9% for its fiscal third quarter, quite a bit better than the consensus expectation of just under 6%. Growth was clearly fueled by food inflation of more than 5%; case volume growth was about 2% and real sales growth was just under 3%. That is relatively consistent with the customer traffic patterns being reported by major U.S. restaurant chains like McDonald's (NYSE:MCD) and Brinker (NYSE:EAT), so there is not much reason to think that Sysco is losing share.

Profitability continues to be a bit more challenging, though. Gross margin slid about 30 basis points this quarter, and Sysco picked up a bit of that through the operating expenses, as operating expense grew a little more than 7% and operating margin slipped about 10 basis points. (For help, check out Understanding The Income Statement.)

How Far Can Sysco Push?
Sysco has a great deal of leverage when it comes to pushing along its higher costs. Restaurants thrive on consistency, and they are not going to drop Sysco lightly. By the same token, restaurants are getting squeezed between higher food and fuel costs (distributors like Sysco tack on fuel surcharges) and higher capital equipment costs from companies like Middleby (Nasdaq:MIDD) and Manitowoc (NYSE:MTW).

At some point, then, something has to give. Restaurants will delay capital equipment spending as long as they can, but the intense pressure of value menus from quick-service chains and prix fixe offerings from brands run by Brinker, Darden (NYSE:DRI) and DineEquity (NYSE:DIN) limit how much cost inflation they can push on to their customers. Along similar lines, though, is the threat that a rival like Performance Food Group or U.S. Foodservice will absorb some of that inflation themselves to gain share. (To help you fight food cost, see 22 Ways To Fight Rising Food Prices.)

Looking to Go Overseas
Sysco is hoping that it can replicate its success overseas. There are plenty of restaurants and food service operations in other countries, and it should be a growth industry in emerging markets as standards of living improve. That said, it takes time and money to build the distribution networks, and this will be a slow process that will take years to show real results.

The Bottom Line
Sysco's popularity with the dividend and conservative growth crowds means that it rarely falls to a compelling valuation point. The same is true today. Investors buying Sysco today can probably look at 10% appreciation before reaching fair value. Remember, though, that Sysco pays better than a 3% dividend and should be able to grow free cash flow at a mid-single digit rate for the long term. All in all, then, that's a setup for market-equivalent growth with below-average risk, and that is not a bad combination. (To learn more about growth stocks, check out The Power Of Dividend Growth.)

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

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!