Has Sysco Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, and then decide if Sysco (NYSE: SYY  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Sysco.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

3.9%

Fail

 

One-year revenue growth > 12%

7.8%

Fail

Margins

Gross margin > 35%

18.1%

Fail

 

Net margin > 15%

2.6%

Fail

Balance sheet

Debt to equity < 50%

64.4%

Fail

 

Current ratio > 1.3

1.78

Pass

Opportunities

Return on equity > 15%

23.9%

Pass

Valuation

Normalized P/E < 20

15.08

Pass

Dividends

Current yield > 2%

3.4%

Pass

 

Five-year dividend growth > 10%

7.7%

Fail

       
 

Total Score

 

4 out of 10

Source: S&P Capital IQ.Total score = number of passes.

Since we looked at Sysco last year, the company has kept its four-point score. But the stock has done reasonably well, gaining about 25% over the past year.

In an investing climate in which investors are looking for strong dividends, Sysco is the epitome of a solid stock. With a high but not overly high yield, reasonable payout ratio, and consistent dividend growth without the threat of overhanging debt, Sysco has made investors happy for years.

But despite its success, Sysco still faces some serious challenges. On one hand, the same food inflation that has led to higher prices for ag industry leader Archer Daniels Midland (NYSE: ADM  ) also has a big impact on Sysco's food services business, which profits from delivering those goods to food preparation businesses. At the same time, restaurants are having trouble figuring out how to pass on some of those added costs to consumers, with even highflying Buffalo Wild Wings (Nasdaq: BWLD  ) and Chipotle Mexican Grill (NYSE: CMG  ) having succumbed to pressure on their stock prices during the summer.

Still, Sysco absolutely dominates its industry. With 400,000 customers, Sysco is more vulnerable to macroeconomic trends than to business-specific risks. That's much different from what United Natural Foods (Nasdaq: UNFI  ) faces, where changing trends can really bite into its profit.

For Sysco to improve, the easiest thing for it to do would be to get its debt somewhat more under control. From there, it will take better revenue growth to get Sysco moving in the direction of perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Sysco may not be perfect, but we have some other ideas that might be better. Let me invite you to learn about three smart long-term stock plays in the Fool's popular special report. It's yours for the taking and is absolutely free, so don't miss out -- click here and read it today.

Click here to add Sysco to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Chipotle. Motley Fool newsletter services have recommended buying shares of Buffalo Wild Wings, Chipotle, and Sysco, as well as writing covered calls on Buffalo Wild Wings. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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