Not Hungry for Sysco

Given the impact that hurricane season had on casual dining chains and fast-food restaurants throughout the Southeast, it should come as little surprise that the company that supplies those eateries with much of their food might also have quarterly sales numbers that are a little watered down. This morning we found out, when food distributor Sysco (NYSE: SYY  ) reported a modest 5.6% increase in first-quarter revenues to $7.5 billion, which would have actually declined slightly without the help of acquisitions and inflation.

Sales figures could have been worse, though; the company noted that nine of its 11 subsidiaries operating in the affected regions managed to improve sales on a year-over-year basis. Furthermore, the gains look respectable relative to the 2.9% third-quarter sales growth posted by rival Royal Ahold's (NYSE: AHO  ) US Foodservice unit. Nevertheless, a gradual slowdown in Sysco's top line remains a concern. After the company delivered double-digit compounded sales growth during the past decade, revenue growth slowed last year to an inflation-adjusted 3.7% gain.

Earnings continued their upward march, as they have done in each of the past 28 years. Aided by further improvement in operating expenses (which have fallen from 15.1% to 14% over the past 18 months), earnings climbed 9.4% to $0.35 ($225.9 million), in line with estimates.

As the leading company in a mature industry, Sysco enjoys streamlined distribution, purchasing power, and economies of scale. However, after acquiring 120 smaller companies and building an impressive customer base that includes fast-food outlets such as Wendy's (NYSE: WEN  ) and casual diners such as Applebee's (Nasdaq: APPB  ) -- as well as 400,000 other restaurants, hospitals, schools, and hotels -- the company is struggling to find new sources of growth.

The long-run trend, however, seems to favor consumer preference for dining out rather than staying in, and Sysco provides one of the few products for which demand is a foregone conclusion. The company also offers an attractive dividend yield and some of the highest profitability metrics in the extremely low-margin business.

Operating margins, for example, have expanded to 5%, more than double the 2% of Performance Food Group (Nasdaq: PFGC  ) , the No. 3 player in the space. Return on equity (ROE) has also steadily risen, from 28% to 38% over the past few years. Sysco's stability and consistency come at a price, however, and at 24 times trailing earnings, the firm's rich valuation is likely more decadent than some investors are willing to consider.

For related stories on Sysco, see:

Fool contributor Nathan Slaughter owns none of the companies mentioned.


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