This Food Distributor Is a Long-Term Buy

Sysco Corporation (NYSE: SYY  ) has advanced quite nicely since the beginning of October this year; it's up from $31.70 per share to $36.20 per share. The optimism surrounding Sysco has been bolstered by its recent announcement that it will acquire US Foods. With this acquisition, is Sysco a better buy than its peers United Natural Foods (NASDAQ: UNFI  ) and Core-Mark Holding (NASDAQ: CORE  ) ?

The deal overview
Sysco will spend $3.5 billion to acquire US Foods. Including US Foods' net debt of $4.7 billion, the total enterprise value of this deal reaches a whopping $8.2 billion. Around $500 million in cash will be paid to US Foods, while the remaining $3 billion will be paid in Sysco's shares. Sysco expects that in the next three to four years, the potential synergies between the two companies will deliver annualized savings of $600 million, which will come from synergies of logistics, infrastructure, COGS, warehouse and distribution productivity, and general & administrative costs. After the acquisition, Sysco's total sales will reach around $65 million, with cash flow of $2 billion. The deal's valuation comes out to around 9.9 times US Foods' adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $826 million.  This valuation is just a bit higher than Sysco's current EBITDA multiple at 9.1. 

The largest customer base, the lowest valuation, and the highest dividend yield
I personally also like Sysco because of its huge customer base. Sysco currently has around 425,000 customers, including restaurants, health care and educational facilities, and other food-service customers.  United Natural Foods and Core-Mark possess much narrower customer bases. While United Natural Foods currently serves 31,000 customers in the U.S. and Canada, Core-Mark, with its 28 distribution centers, distributes diverse products to more than 29,000 customer locations.

Based on its current valuation and dividend yield, Sysco is also preferable to United Natural Foods and Core-Mark. At the current price, Sysco offers investors a sweet dividend yield of 3.40% with a reasonable payout ratio of 66%. While United Natural Foods pays no dividends, Core-Mark's dividend yield is much lower, at 1.20%, with a conservative payout ratio of 24%. If Core-Mark increased its payout ratio to 66%, which would be equivalent to Sysco's payout ratio, Core-Mark's dividend yield would reach 3.3%.

In terms of valuation, Sysco is the most cheaply valued among these three at only 9.1 times its EV/EBITDA. Core-Mark ranks second with an EBITDA multiple of 10.1. United Natural Foods has the highest EBITDA multiple at 15.3. The high valuation of United Natural Foods might be due to its potential double-digit revenue growth and its focus on the organic food business. United Natural Foods has been the main supplier of natural and organic products to Whole Foods for more than 12 years, and it will continue to do so until September 2020 under an existing contract with Whole Foods. As Whole Foods is United Natural Foods' biggest customer, accounting for 36% of its sales, United Natural Foods' business results will rely heavily on the operating performance of Whole Foods.

My Foolish take
I personally think that Sysco paid a reasonable price for US Foods. With potential synergies that could save at least $600 million annually, the deal will drive Sysco's operating performance and shareholder value in the long run. Moreover, investors can sleep well when investing in Sysco because of its large customer base and its sweet dividend yield. 

Want to retire rich?
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report, "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2770207, ~/Articles/ArticleHandler.aspx, 9/29/2016 11:24:14 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 hours ago Sponsored by:
DOW 18,143.45 -195.79 -1.07%
S&P 500 2,151.13 -20.24 -0.93%
NASD 5,269.15 -49.39 -0.93%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/29/2016 4:00 PM
CORE $36.85 Up +0.21 +0.57%
Core-Mark Holding CAPS Rating: **
SYY $49.03 Down -0.41 -0.83%
Sysco CAPS Rating: *****
UNFI $39.21 Down -0.16 -0.41%
United Natural Foo… CAPS Rating: ****