Sysco (SYY) Stock Could Be a Great Pick in 2017: Here’s Why

Sysco Corporation’s SYY shares gained 37.3% over the past one year, outperforming the Zacks categorized Food-Miscellaneous/Diversified industry which witnessed an improvement of 9.7% in the same time frame. The rally was driven by Sysco’s impressive earnings history and solid growth strategies.

Further, we believe there is still much momentum left in the stock, which is quite evident from its VGM Score of “B”, a low beta of 0.54 and long-term earnings growth rate of 8.6%.

What further makes us optimistic about its performance in the near term is its uptrend in estimates since the company reported its first quarter fiscal 2017 results on Nov 7. The Zacks Consensus Estimate for fiscal 2017 and 2018 has been rising 4.3% to $2.42 and 2.3% to $2.68, respectively over the past 60 days.

Underlying Growth Drivers

Starting with Sysco’s past performance, we note that its first-quarter fiscal 2017 earnings per share exceeded the Zacks Consensus Estimate while revenues were in line with the same. In fact, Sysco has an average earnings surprise of 11.7% in the trailing four quarters.

The acquisition of London-based Brakes Group and margin improvement probably drove the earnings beat. Adjusted earnings were up 28.8% year over year on the back of expense management and improved margins. Sales also improved 11.2% on a year-over-year basis, despite unfavorable currency. We note that 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 six consecutive quarters, after consistent declines since the last two fiscal years. Activist investor Trian Fund Management also bolstered its stake in the company.

Additionally, Sysco 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. The latest dividend increase of 6%, announced on Nov 18, was above management’s projection of a forward five-year dividend growth rate of 3–5%.

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 in 2017, creating a modest sales and gross profit headwind.

Nevertheless, we believe the aforementioned factors would help this Zacks Rank #2 (Buy) company sustain its strong momentum and stay afloat even amid difficult times. Further, its earnings are expected to grow by 15.4% in fiscal 2017 and 10.4% in fiscal 2018.

Other Stocks that Warrant a Look

Some other stocks in the food industry worth considering include B&G Foods, Inc. BGS, Pinnacle Foods, Inc. PF and Lancaster Colony Corporation LANC. While B&G Foods holds a Zacks Rank #1 (Strong Buy), Pinnacle and Lancaster Colony carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

B&G Foods has an average positive earnings surprise of 12.2% in the trailing four quarters. It also has a long-term earnings growth rate of 8.0%.

While Pinnacle Foods has a long-term earnings growth rate of 6.5%, Lancaster Colony has a growth rate of 3.00%.

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