Will SYSCO Sink or Swim?

Value traps have many of the hallmarks that value investors typically seek in a stock: apparently strong returns on capital, wide moats around their business, and sustainable business with recurrent demand. Yet for whatever reason, the allure turns out to be a siren's song for the unwary investor. Given those criteria, it's fair to wonder whether Income Investor recommendation SYSCO (NYSE: SYY  ) fits the bill as a true value stock or a value trap.

Unfortunately, results for the company's fiscal fourth quarter do little to answer the question. Revenue growth rose more than 6%, a decent showing that included a new accounting policy's negative impact on sales recognition. What's more, there was actual cost inflation this time around, which is good for margins.

Speaking of margins, gross margins were better this time around, and would have been even without the benefit of that aforementioned accounting change. On the operating line, though, operating income was down about 6%, due partly to stock compensation expense. By the same token, even if you add back that incremental expense, operating profits were still down slightly.

I also have some concerns about the company's market position. I don't really think that U.S. Foodservice (part of Royal Ahold (NYSE: AHO  ) ) is a major threat, but if I'm interpreting the data in SYSCO's press release correctly, it looks like they've nevertheless surrendered a little bit of market share. Of course, that could be just a blip on the scope, and there's plenty of remaining opportunities, ranging from organics for Whole Foods (Nasdaq: WFMI  ) to food service for institutions. Either way, though, the market-share slip bears watching.

All things considered, SYSCO should be seeing better results in the next few quarters. Companies like Tyson (NYSE: TSN  ) , Pilgrim's Pride (NYSE: PPC  ) , and Smithfield (NYSE: SFD  ) are still seeing weak pricing for meats, and overall food costs seem to be abating. What's more, the company's customer-review process does seem to stimulate sales, at least in the short run.

I've learned over the years that an investor does well to remain skeptical, and I've been skeptical on SYSCO for quite a while. That's not to say SYSCO may not be a value someday (or even today, perhaps), but it's not quite the slam-dunk that it's sometimes portrayed to be.

Further food-fueled Foolishness:

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Fool contributorStephen Simpsonhas no financial interest in any stocks mentioned (that means he's neither long nor short the shares). Whole Foods is aMotley Fool Stock Advisorpick. The Fool has a disclosure policy.

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