Sysco's Unsatisfying Valuation

Warnings of mad cow disease didn't prevent Sysco (NYSE: SYY  ) , the nation's largest food distributor, from posting a meaty 21% gain in net income yesterday for its fiscal 2004 second quarter. The market took notice, sending Sysco shares up 3% by the close of Monday's trading.

For the quarter, sales rose 10.8% to $7 billion, with operating expenses falling to 14.2% of sales, down from 14.8% last year. The expense reductions were important, offsetting a small decline in gross margins.

What's most impressive about the quarter is that there were several available excuses for Sysco had it performed poorly. Indeed, the firm said its aggregate food prices were up by more than 7%, and the first U.S. case of mad cow disease was reported last month. But Americans bought burgers by the truckload, and are still doing so. Sysco says its sales of beef for the first three weeks of January are up from the same period a year ago.

The Sygma Network, the company's chain restaurant service arm, did especially well, increasing business with its largest customer, Wendy's (NYSE: WEN  ) . Sysco also reported new service agreements with Panera Bread (Nasdaq: PNRA  ) and Applebee's (Nasdaq: APPB  ) and acquired a Denver distribution center that boosted business with Darden Restaurants' (NYSE: DRI  ) Red Lobster and Olive Garden chains.

There's plenty to like about Sysco's business. It has returned roughly $0.13 to investors for every dollar spent on assets, and the company's dividend yield of 1.38% is within spitting distance of the S&P 500's yield of 1.50%. (Sysco increased its quarterly dividend in November.)

If only there were more meat behind Sysco's valuation. The company's forward price-to-earnings ratio hovers near 24, a reasonable premium if the firm can continue 21% net income growth. But history shows that Sysco has grown earnings 13% to 15% annually over the past two years, and operating cash flow declined by more than 20% in the most recent quarter due to increased tax payments.

Buying Sysco shares at this point may prove to be like ordering a burger without the fries. With apologies to Atkins dieters, that may still be tantalizing, but isn't enough to be satisfying.

Are you on the Atkins diet or any of the popular alternatives? Find like-minded Fools at the Low Carb Way of Life discussion board -- only at

Tim Beyers loves a good burger, but he likes fries even more. He doesn't own shares of any of the companies mentioned.

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