Don’t Underestimate Sysco

Sysco (SYY 0.44%) is a foodservice company that distributes its products to restaurants, health care and educational facilities, lodging establishments, summer camps, and more. It has been around since 1969 and sports a market cap of $18.96 billion.

Throughout its years in business, Sysco has expanded geographically. Its primary customers are in the United States and Canada, but it also serves the Bahamas, Canada, Northern Ireland, and Ireland. With this type of geographic exposure, you would likely think that Sysco is capable of rewarding its shareholders handsomely, as it has done so often in the past. However, two trends stand in the way. 

Strong headwinds
The bad news is that the foodservice industry can't grow without consumer confidence. And with a recent 2% increase in the payroll tax, elevated gas prices, and a lack of personal income growth, Sysco is concerned about industry trends. Another significant headwind is the consumer shift toward organic food. According to the Nutrition Business Journal, organic food sales have grown from $11 billion in 2004 to $27 billion in 2012. This is why United Natural Foods (UNFI -3.28%) and Hain Celestial (HAIN -7.61%) have outperformed Sysco over the past several years. 

The good news is that according to Sysco's own estimates, the foodservice market represents 48% of total dollars spent on food purchases. Since Sysco serves 18% of this $235 billion market, it's safe to assume that even if Sysco suffers from difficult times ahead, it's likely to remain a big player in a market that will always exist. 

Reasons to believe 
If you're on the hunt for more reasons to be optimistic, then consider that total foodservice market sales increased 1.3% in 2012 throughout the industry, which was a substantial improvement over a 0.1% decline in 2011. Furthermore, despite headwinds, Sysco is confident that it's capable of growing at a faster rate than its peers and increasing its market share, regardless of the economic environment. Unlike many other companies throughout various industries, Sysco isn't stubborn. It intends to shift its product lineup in order to meet consumer demands and be in line with industry trends. In other words, it would like to offer more in the way of organic foods. 

Since Sysco has deeper pockets than United Natural Foods and Hain Celestial, it has the potential to enter the market and steal market share right away -- it's capable of marketing its products to potential customers on a grander scale. However, United Natural Foods and Hain Celestial have strong momentum.

Compelling value
If you're considering an investment in one of these three companies, then consider the fundamental comparisons below:

Several of those numbers stand out. One, with Sysco trading at just 19 times earnings, it offers a better valuation than peers. Two, Sysco's ROE of 20.10% shows you that it's effective at turning your investment dollars into profit. Three, and perhaps most important, is that Sysco yields a very impressive 3.50% while debt management is good.

United Natural Foods and Hain Celestial have higher multiples, but considering they're selling products that go along with current demand, these multiples might be worth paying. It's simply a matter of whether you want more safety along with dividend payments (Sysco) or growth potential (United Natural Foods and Hain Celestial).

Recent performance and strategic initiatives
In fiscal year 2013, Sysco's sales jumped 4.8% to $44.4 billion. On the surface, this is very impressive, especially considering the current economic environment and industry in which Sysco operates. This sales increase was mostly due to product cost inflation, higher selling prices, and sales from the company's 14 acquired companies in FY 2013. That said, excluding acquisitions, sales still improved 1.3%.

Diluted EPS plummeted 12.1% for the year to $1.67. Sysco plans on streamlining operations, increasing warehouse productivity, aligning compensation and benefit plans, changing its product assortment, simplifying its process, and reducing system loads in order to improve the bottom line.

The Foolish bottom line
Sysco is operating in a low-growth market, which has the potential to lead to pricing pressure. However, Sysco is highly focused on rearranging its operations in order to cut costs and cater to consumer demand. Considering Sysco's deep pockets and brand strength, it should be capable of accomplishing this goal. The only negative is that it's likely to be a long and bumpy ride. The big selling point here is that you will have an opportunity to collect healthy dividend payments as you wait for everything to play out.