We expect Sysco Corporation (SYY) to beat expectations when it reports fiscal second-quarter 2015 results before the opening bell on Feb 2.
Last quarter, this global food products maker and distributor delivered a positive surprise of 4.00%. In fact, the company beat the Zacks Consensus Estimate in three out of the last four quarters with an average surprise of 5.89%.
Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Sysco is likely to beat earnings this quarter because it has the right combination of two key ingredients.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.44%. This is a meaningful and leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Sysco carries a Zacks Rank #2 (Buy) which when combined with +2.44% ESP makes us confident of an earnings beat.
Note that stocks with Zacks Rank #1, #2 or #3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement.
What is Driving the Better-Than-Expected Earnings?
The company’s consistent improvement in sales, driven by back-to-back acquisitions and volume growth, has boosted earnings over the past few quarters.
Despite currency headwinds and gross margin pressure, Sysco’s growth strategy remains strong and its efforts to accelerate sales, reduce costs and mitigate the ongoing gross margin pressure are encouraging. We expect to see a gradual improvement in these areas through 2015.
The company has acquired businesses over the years to grow its distribution network and customer base and boost long-term growth. The company expects to achieve 0.5–1% sales growth through acquisitions in the long term. Other than sales growth, these acquisitions also enhance its presence in international markets and boost its product portfolio.
We are currently looking forward to Sysco’s acquisition of US Foods for $8.2 billion. The deal, which was announced in Dec 2013, is currently undergoing a regulatory review process by the Federal Trade Commission. If approved, the deal will be a strategic fit for both Sysco and US Foods. Together they are expected to improve supply chain efficiencies and general and administrative activities. The merger will give increased size and scale to the Sysco business and will also provide significant cost saving opportunities. The company expects to generate at least $600 million in synergies from this acquisition over three to four years from both overhead and procurement savings. The company expects the deal to close around the first quarter of calendar 2015.
Other Stocks to Consider
Other stocks in the consumer staple sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Supervalu Inc. (SVU) with an Earnings ESP of +4.76% and a Zacks Rank #1 (Strong Buy)
Tyson Foods, Inc. (TSN) with an Earnings ESP of +2.78% and a Zacks Rank #2.
Reynolds American Inc. (RAI) with an Earnings ESP of +1.15% and a Zacks Rank #2.
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