Avoid taking a bite out of Sysco stock
Tuesday, February 3rd, 2014
Earnings are coming out for the fourth quarter of 2014 and, while some companies are doing well, others aren't and are giving lower guidance.
Investors and others have been asking what is causing this. They may not like the results on the company's performance of stocks they own.
I'm talking about the rise in the dollar.
It was not long ago that many people were concerned about how low the dollar had fallen. The decline is not a bad thing because the lower dollar makes our exports more affordable. It also increases profits for many companies that make their products here and used U.S. labor to make those products.
However, with the strength of the dollar, companies are seeing lower profit margins as they sell their products overseas against weaker currencies.
More than half of the Standard & Poor's 500 companies get a substantial amount of their earnings from overseas.
So in 2015, as the U.S. economy continues to perform well, this will strengthen the dollar even more and hurt company profits to some degree. The strong dollar will also make foreign products more attractive for U.S. consumers, and they will continue to buy foreign products at a discounted rate.
We will see our trade deficit increase as imports climb and exports decline.
So for those who were wishing for a stronger dollar, your wish is coming true.
Another wish I'm hearing is that we need to see wages go higher. This will happen, and the result will lead to higher inflation and higher interest rates.
I recently received a request to look at the food company Sysco (NYSE: SYY) - not to be confused with the networking company Cisco Systems Inc. (Nasdaq: CSCO).
It appears that after the first quarter, this company is going to acquire U.S. Foods. Without looking at U.S. Foods, I would imagine that this would hurt the earnings and the balance sheet on the short term.
But this has not happened yet, so I will take a look at Sysco's numbers without the addition of U.S. Foods.
The stock trades about $40 per share and has a 52-week high of $41.45 and a 52-week low of $34.07. The current dividend of $1.20 per year equals about a 2.9 percent return.
The price-earnings ratio for the company based on the past 12 months is high at 26 times earnings, compared with the industry average of 16.2 times earnings. Price to sales also favors the industry at 0.42, compared with the company's price to sales of 0.51.
Price to tangible book value looks better for the company at 7.6 times, compared with the industry average at 8.0 times. And last, price to cash flow favors the company at 12.8 times less than the industry average of 14.0 times.
Sales for the company climbed by 4.9 percent year over year forthe past 12 months, which is below the industry average of 6.1 percent.
Earnings per share do not look good at all over the past 12 months year over year, declining by 6.4 percent when the industry saw a decline in earnings per share of only 0.8 percent.
The financial strength of Sysco Corp. does look good with a current ratio of 1.6 - far better than the industry average of 1.2. Also impressive was a debt to equity at 57.1, which is far below the industry average of 91.2.
I should also point out that most of the debt is long term and not at the risk of increasing interest rates on short-term debt. Sysco Corp. has a good return on equity of 17.6 percent - not as good as the industry at 27.4 percent, but I'm OK with any company that can return more than 15 percent on its equity.
Net profit margin for the company checks in at 2.0 percent, which is under the industry average of 2.62 percent. It would be nice to see the company increase its net profit margin, also known as the bottom line.
The efficiency of the company looks rather poor when considering that the receivable turnover for the last 12 months is only 13.4 times - far below the retail grocery industry and 36.8 times over the last 12 months.
Inventory turnover for the last 12 months slightly favors Sysco at 14.5 times, just above the industry average of 14.1 times.
Looking forward for the company, which reports on a fiscal-year basis, to June 2016, the mean of 13 analysts are looking for earnings of $2.04, with the high estimate being $2.15 and a low estimate of a $1.92, a fairly tight range.
Using a forward PE of 16.5 would yield a target sale price of $33.66, well below the current price.
Based on this information, along with the weak earnings growth and a high price-to-earnings growth ratio of 3.03, I recommend investors look for better values other places.
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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