Sysco stock: more attractive with its remaining $4.5 billion share buyback program (NYSE: SYY)

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Sysco Company (New York stock market :NYSE: SYY) ended its fourth quarter of 2022 beating the consensus estimate for its revenue and earnings per share, and they generated their highest ever revenue of $68.63 billion. Unfortunately, the stock price is still lower than it was as of the date of the Company’s earnings report (August 9, 2022). The market continues to exercise extreme caution on lingering inflation concerns. The company has successfully navigated its way to post-pandemic recovery and is strongly positioned to thrive in today’s post-pandemic era.

The company addressed its persistent labor shortage with the launch of its Sysco Driver Academy and successfully expanded its employee base in fiscal year 2022. Operating margin remains high compared to to pre-pandemic levels. Profitability remains under pressure due to the current increase in fuel prices. However, it remains attractive with its management’s positive EPS guidance for FY2023. With these catalysts in place, I think SYY remains a buy after a strong rally from the 2020 low.

Company presentation

Sysco Corporation is one of the world leaders in the foodservice distribution industry. It is also a Fortune 500 company that offers a wide range of products and services used by restaurants, healthcare facilities, schools and other institutions. The 2022 financial year reveals that restaurants contribute the majority of their income; in fact, restaurants account for 63% of its total revenue, which grew 33.80% year over year.

According to National Restaurant Association, the industry is expected to reach $898 billion this year, up from $799 billion in 2021. With the post-pandemic recovery phase underway, I believe the restaurant industry will remain strong despite today’s potential recession. today. In addition, 16% of the company’s revenue comes from the healthcare (8%) and education/government (8%) sectors. These are the two sectors that management believes will be least affected by the forecast recession.

Therefore, the majority of its revenue remains secure for now, building positive momentum towards its best fiscal year 2023, as shown below.

Overall, we are increasing our adjusted EPS on the back of volume growth and improved earnings which are contributing to our substantial earnings per share increases. We expect adjusted EPS for FY23 of $4.09 to $4.39. The midpoint of this range equates to a 30% increase in Adjusted EPS from FY22. It also represents a 20% increase in our Adjusted EPS from our previous high point, FY2019. Source : Transcript of the fourth quarter 2022 earnings call.

Looking at the company’s gross margin trend, we can clearly see that SYY is facing challenges with inflationary pressures today.

SYY: Gross margin trend over 5 years

SYY: gross margin trend over 5 years (Source: SeekingAlpha data, prepared by InvestOhTrader)

However, upon further investigation in addition to inflationary pressure, the decline in its gross margin was due to the writedown of personal protective equipment inventories related to Covid-19. Looking at its adjusted gross margin of 18.06%, we can see that the drop is not that massive compared to its GAAP gross margin of 17.95%.

Moreover, its operating margin produced a figure of 3.73% for FY22, better than its 3.25% for FY21 and 1.78% for FY20, but it is still below its FY19 and FY18 levels of 3.82% and 4.00%, respectively. This was due to improved operational efficiency, where the company produced an improved total operating expense ratio of 14.22%, above its 5-year average of 15.46% and beating its benchmark levels. before the pandemic, as shown in the image below.

SYY: Improvement in the ratio of total operating expenses to total sales

SYY: Improvement in the ratio of total operating expenses to total sales (Source: SeekingAlpha data, prepared by InvestOhTrader)

It is thanks to the successful implementation of its “Recipe for growth“; in fact, according to management, they have already exceeded their cumulative savings target of $750 million. This positively offsets the pressures of additional labor costs and ongoing investments in productivity. Here are some- some of SYY’s investments in technology that drive operations efficiency, as shown below.

The Distributed Order Management System technology will go live this quarter and it will allow us to decouple front-end sales from back-end operations. And by doing that, we can ensure that we reduce the miles traveled, which means serving the customer from the closest warehouse possible.

It sounds basic and obvious, but it’s a significant technology unlock, but it’s also going to help us with our strategic product storage, what product is where. Think of slow moving SKUs and fewer warehouses that are then transhipped through last mile delivery location and being really strategic and optimized to grow our inventory capacity, but doing it overall over time time, less inventory, less working capital. Source: Q4 2022 Earnings Call Transcript.

Other points of investment are their Sysco Driver Academy and their loyalty program, Sysco Perks, which should improve both the productivity of the company and the rate of customer retention.

Become bigger and better

In FY2022, SYY acquired leading companies such as Greco and son, Paragon Foodsand leader in the distribution of fresh products, Coastal businesses. SYY remains very aggressive in expanding through acquisitions despite today’s macro headwinds and still returned $1.5 billion to shareholders, as shown below.

…we returned $1.5 billion to shareholders through 500 million fourth-quarter share buybacks and $959 million in dividends. Source: Q4 2022 Earnings Call Transcript

In fact, according to management, regardless of market conditions, they expect to outperform the restaurant market by 1.35x and generate a ~10% positive increase in revenue year over year. another in fiscal year 2023.

Due to their confidence, they have increased their annual dividend to $1.96 per share from $1.88 per share in fiscal 2022. Additionally, at the time of this writing, this provides a yield in dividends of 2.34%, which could improve further with its potential correction in the coming trading weeks, as we will see below.

Finally, the company has a market capitalization of $42,458 million at the time of this writing, and another value-added catalyst worth mentioning is its approval of a $5.0 billion share buyback program. as part of its Recipe for Growth strategy, with a $4.5 billion share buyback authorization. still remaining.

Remains fundamentally undervalued

SYY has improving profitability as shown by its historical ROE of 92.59%, which is much better compared to its industry median of 12.21%. This sort of explains why it is trading at a higher multiple than its sector. So looking at its EV/EBITDA ratio of 15.91x versus its industry median of 12.87x may put some investors off. However, given its forward EV/EBITDA of 12.97x and its 5-year average of 17.12x, I believe SYY remains fundamentally undervalued, especially given its remaining share buyback program of $4.5 billion. Using the Wall Street high target price of $100 as a conservative target price offers a decent upside of around 20% at the time of writing.

A few risks to consider: Despite the current inflationary pressures, SYY has managed to control its margin, as mentioned earlier. However, a prolonged and continuous increase in the prices of fuel and other necessary goods can affect the company’s overall demand.

About to challenge his $91 mark

SYY: weekly chart

SYY: weekly chart (Source: TradingView.com)

The 50-day simple moving average is currently serving as support on the weekly chart. Additionally, based on its price action, SYY appears to be struggling to breach the $86 level, which has already been attempted three times this year – in February, May and July – but without success. As the chart above shows, its MACD indicator was already indicating weakness. If there is a correction, I think $70-$75 will be a strong support area to watch.

Final takeaways

In the current inflationary environment, SYY is showing resilience with its exceptional growth and can successfully control its margin. In addition to this catalyst, SYY has a liquid balance sheet and Moody’s has reaffirmed its investment grade credit rating. Its general liquidity ratio remains below its three-year average of 1.54x, mainly due to cash acquisitions. With a net debt to adjusted EBITDA ratio of 2.9x for FY22, it delivered a better figure than ~4.0x for FY21 and ~5.9x for FY20. This implies an improvement in long-term liquidity. Another value-added catalyst is management’s expectation of a 2.5x to 2.75x range for FY23. In conclusion, SYY remains fundamentally solid and is an attractive long candidate.

Thanks for the reading!

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