Sysco vs. Supervalu: Which Food Stock Is a Better Pick?

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The grocery business is grappling with headwinds like food deflation, stiff competition, and aggressive promotional environment. Traditional grocery rivals are strengthening their franchises and outside players are offering alternative outlets for food and other staples. Customers are becoming more inclined toward private label products as they are low cost alternatives to national brands.

Food deflation across major parts of the market from the past two quarters has added to the woes in the industry. Oversupply in some types of food - particularly meat, poultry and dairy - has dragged prices lower and forced grocery stores into more aggressive promotions. These headwinds have impacted share price of major food grocers like The Kroger Co., Whole Foods Market, Inc., and Sprouts Farmers Market.

The not-so-impressive scenario in the food/grocery industry is evident from the fact that out of the 260-plus industries, the Food-Miscellaneous Industry holds a Zacks Industry Rank #186, which is part of the bottom 27% of the Zacks Classified industries. Even the broader Consumer Staples sector is placed at the bottom 25% of the Zacks Classified sectors (12 out of 16).

Given this backdrop, let's try to ascertain which of these two key food players - Sysco Corp. SYY and Supervalu, Inc. SVU , presently make for a better investment option.

Zacks Rank

Our proprietary Zacks Rank, which is designed to predict price movements over the next one to three months, comes in handy in this scenario. Going by this metric, both Sysco and Supervalu carry the Zacks Rank #3 (Hold), highlighting the fact that they are likely to perform in-line with the broader market over the next one to three months. You can see the complete list of today's Zacks #1 Rank(Strong Buy)stocks here.

The favorable Zacks Rank of Sysco is primarily attributed to its continued focus on acquisitions, volume growth, and margin improvement that drive its revenues and earnings. On May 8, Sysco reported third-quarter fiscal 2017 results, wherein while earnings met expectations, the top line outpaced estimates. We note that the company's earnings outpaced the Zacks Consensus Estimate in five of the last seven quarters, and reported in-line earnings in the remaining two. Earnings rose 10.9% in the quarter, driven by growth in sales, expense management and improved gross and operating margin.

The acquisition of London-based Brakes Group led to a sales increase of 12.7% on a year-over-year basis. We note that the company's sales have improved consistently driven by acquisitions and volume growth. Sysco's efforts to boost sales and margins are paying up, as the company has delivered positive gross margins in the last eight consecutive quarters, after declining consistently since past several quarters. However, stiff competition remains a concern.

On the other hand, after posting negative earnings surprise of 61.5% in fiscal third-quarter, Supervalu posted positive earnings surprise of 44.4% in fourth-quarter fiscal 2017. SUPERVALU posted adjusted earnings per share of 13 cents per share that outpaced the Zacks Consensus Estimate of 9 cents per share. However, earnings fell 7.1% from the prior-year quarter.

We note that the company does not have a good track record of earnings and has reported negative surprises in two of the past three quarters. It continues to face tough competitive pressure that has hit the grocery industry as a whole. Deflationary environment in food products and depleting footfalls at the supermarkets are the major causes of concern for the company.

Nevertheless, we commend its decision to spin off its Save-A-Lot stores as this will help the company to concentrate on its more profitable core businesses. Moreover, it has undertaken several initiatives to improve comps in the retail sector and increase operating efficiency.

Market Capitalization

Sysco's market capitalization is $29.13 billion, while that of Supervalu is a mere $1.03 billion. Going by its business size, Sysco is undoubtedly a winner. Though Sysco's massive scale of operations better position it in the long term, short-term industry headwinds are likely to adversely impact both the companies.

VGM Score

With the help of our new style score system , it is easy to pick the winning stocks. In order to screen out potential value stocks, we consider only those that have a Zacks Rank #1 or #2 (Buy) and a value score of 'A' or 'B.'

While both Sysco and Supervalu carry a favorable VGM score of 'B,' their Value and Momentum Style Scores are different. At one place, Eden Prairie, MN-based Supervalu's Value Style score of 'A' is better than Sysco's Value score of 'B,' while on the other hand, Sysco's Momentum Style score of 'A' outpaces Supervalu's Momentum score of 'D.'

Therefore, to select a better stock on the basis of VGM score is difficult here.

Price Performance

The impact of the updates is well-reflected in the price performance of the companies so far this year. While shares of Supervalu have underperformed the Zacks categorized Food-Miscellaneous/Diversified Market industry, those of Sysco have significantly outpaced the industry.

Shares of Sysco improved 13.14%, while Supervalu slipped significantly by 16.85% over the past one year. The industry has advanced 0.92% since past one year.

Estimate Revisions

Upward estimate revisions are indicative of positive investor sentiment about a stock. The Zacks Consensus Estimate for Sysco has inched up 0.4% for both fiscal 2017 and fiscal 2018 over the last 30 days. However, the same has gone down 10.5% for fiscal 2018 and remained unchanged for fiscal 2019 over the last 30 days for Supervalu, reflecting negative outlook on the stock.

Sysco's earnings in fiscal 2017 and 2018 are expected to grow 17.82% and 10.85%, respectively. However, the scenario is not favorable for Supervalu due to industry-wide headwinds. While earnings per share are projected to grow 18.39% in fiscal 2018, it is expected to contract 14.08% in fiscal 2019.

The above arguments clearly states that Sysco is better pick investors.

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Sprouts Farmers Market, Inc. (SFM): Free Stock Analysis Report

Sysco Corporation (SYY): Free Stock Analysis Report

SuperValu Inc. (SVU): Free Stock Analysis Report

Kroger Company (The) (KR): Free Stock Analysis Report

Whole Foods Market, Inc. (WFM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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