Dueling Fools: SYSCO Bull Rebuttal

My Foolish colleague seems too eager to mistake SYSCO's (NYSE: SYY) approaching middle age for an inevitable decline.

SYSCO is indeed the dominant player in a mature industry, and the company's management is projecting unspectacular growth in future years. But SYSCO still controls just 15% of a highly fragmented market that's worth approximately $225 billion. In other words, there's still plenty of opportunity for SYSCO to continue to grab market share from smaller, weaker rivals.

Ryan acknowledges that SYSCO has successfully managed inflation's attacks on its profit margins, but he worries about whether the company can stay as profitable as it is if inflation ramps up. I think his pessimism is misplaced.

Rising costs threaten the profitability of firms in a range of industries, especially if that inflation triggers a recession. However, SYSCO's enormous scale and state-of-the-art distribution infrastructure leave it better-equipped than industry rivals to control rising costs. SYSCO has actually been able to increase revenue during past economic downturns, perhaps at the expense of its less efficient rivals. That kind of steady performance makes this company's stock a very attractive investment in the face of uncertain economic conditions.

Ultimately, it seems that Ryan is much more apprehensive about SYSCO's valuation than its operations. But the data he's chosen to highlight might not provide the best valuation picture. Yes, net earnings have grown just 8% annually over the past five years, but earnings per share have grown by an average rate of more than 10% in that time, thanks to stock buybacks. And while Ryan calculated a modest 5% average growth rate in cash flow, I calculated a nearly 8% growth rate in the company's free cash flow. And that growth came even as the company was investing heavily in new distribution systems.

On a relative basis, SYSCO's stock looks compelling. The dividend's high, the company's known for raising that payout, and it has the cash to keep doing so for years to come. Better yet, its P/E is lower than it's been for most of the past decade. SYSCO's stock deserves to be praised, not buried.