A prudent investment decision involves buying stocks that offer solid prospects and selling those that appear risky. Again, at times it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions. Here we have discussed one such stock, Sysco Corp.SYY , with expected long-term earnings per share growth rate of 8.69% and a VGM Score of "A."
Sysco's stock price history reveals that the stock has notably outperformed the Zacks categorized Food-Miscellaneous/Diversified industry over the past one year. While the stock yielded 17.5%, the industry gained 5.5% in the said time frame. On the other hand, the broader Consumer Staple sector, of which they are part of, grew 5.7% in the same time frame. We believe that this rally has been driven by Sysco's impressive earnings history and solid growth strategies.
Solid Earnings Trend
The Zacks Rank #2 (Buy) company has shown an uptrend in terms of earnings, as evident from its earnings beat in all the trailing four quarters, marking an average positive earnings surprise of 9.29%.
If we look into Sysco's past performance, we note that its second-quarter fiscal 2017 earnings exceeded Zacks Consensus Estimate while revenues were in line with the same. Moreover, Sysco's shares have been outperforming the Zacks categorized industry despite persistent food-cost deflation hurting the overall industry.
The acquisition of London-based Brakes Group and margin improvement probably drove the earnings beat. Adjusted earnings were up 20.8% year over year on the back of expense management and improved margins. Sales also increased 10.7% on a year-over-year basis, despite unfavorable currency.
Sysco Corporation Price, Consensus and EPS Surprise
Sysco has been consistently showcasing an improvement in sales, driven by acquisitions and volume growth. The buyouts of Brakes Group and Supplies on the Fly e-commerce platform are encouraging.
Further, it seems that the company's growth strategy is paying off and its efforts to boost sales and margins are bearing fruit. Sysco has delivered positive gross margins in the last seven consecutive quarters, after consistent declines since the last two fiscal years.
Additionally, Sysco has been impressively managing expenses since the past few years. The company is making progress in both SG&A and supply chain. Due to strong performance, the company has raised the three-year adjusted operating income growth target to approximately $600 million - $650 million through the end of FY18, up from at least $500 million. Sysco also has a consistent track record of returning cash to shareholders in the form of dividend payments. The company has increased its dividend 48 times since its establishment in 1970.
However, persistent food-cost deflation remains a concern since the past few quarters. The company has experienced continued deflation in center-of-the-plate protein categories, such as meat and seafood, as well as in dairy. This deflationary trend is likely to continue at least through fiscal year 2017, creating a modest sales and gross profit headwind.
The restaurant industry, which represents approximately 60% of the food service market, is experiencing soft growth in recent quarters. Restaurant traffic continues to show year-over-year declines and restaurant spend has decelerated as well. The company anticipates continued industry softness and challenging year-over-year comparisons in the second half of fiscal 2017.
Stocks that Warrant a Look
Lamb Weston has long-term earnings growth rate of 3.24% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
ConAgra Foods and Ingredion, both carrying a Zacks Rank #2 (Buy), have growth rates of 8.00% and 11.00%, respectively.
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