The BMW Method
SYY - Investment Thesis - v.1

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By Bakuvdanet
December 8, 2005

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Greetings. I decided it is probably wise for me to develop a template for recording my thoughts on a company and its attractiveness as an investment. With so many numbers floating around (RMS, RF, Earnings, etc.), there needs to be one place to give me a big picture of the company. The primary goal of the investment thesis is to capture on one or two pages the essentials of the company, buy price, exit prices, timeframe, catalysts, risks, rewards, etc. Additionally, writing everything down helps me focus on the company and gives me time to make an unemotional decision. A secondary goal is to use it on the boards as a living document, to which wiser folks than I can add information to flesh out the thesis.

Please feel free to provide comments/suggestions on the format.

With regards to analysis, this is the first, which I hope others find somewhat useful. I encourage you to provide further insight, corrections and fill in any gaps you see under the appropriate sections. I will attempt to incorporate additional comments into subsequent versions. The goal for the next analysis is to look at a company that is closer to BMW Method candidate status.

Happy holidays,

Sysco Corp (SYY) Investment Thesis

Company Name: Sysco Corporation
Ticker: SYY

December 7, 2005
Current Price: $32.51
Dividend Yield: 2.10%

Buy-Around Price: $31.00

Bought Price: $xx.xx (10% drop -> $28.80)
month day, year

The Company / Business
Market leader in manufacture and distribution of foodservice products. Supply food and supplies to restaurants and institutions. Both private label and name brand.

Big Picture / General Observations
Leading distributor to foodservice industry.

Both the dividend and earnings have increased at a faster rate than the CAGR of the stock price. Is this a result of dividend and earnings catching up to a high P/E (average of 29.49 for 2001 fiscal year) from 5 years ago or price not keeping pace with earnings and dividend?

Is the 16 year Ave CAGR of 16.9% today's CAGR? The past 5 years, the Ave CAGR is 7.5%.

Valuation model based on dividends is thrown off a bit due to increase in dividend yield over last 5 years. The dividend has increased while the price trading range has not increased at the same rate. Moving from higher P/E to lower P/E. Is this just a natural adjustment to get back to normal P/E?

Seems attractive for a relatively short time period gain, but do not expect double in 2-3 years. Especially since 2006 could be a flat year. Short term play for maybe 15% gain sometime in 2006 until efficiencies, marketing focus kick in during the 2007 fiscal year. Already half way through FY 2006. The past two years, SYY has traded between $29 and $41. Don't see it going much below $30 unless we have a major downward catalyst.

This appears to be a good long term value investment, though not necessarily up to hardcore BMW Method standards.

BMW Method Metrics
Today / At time of purchase:
16-year chart
Ave CAGR = 16.9%
Current CAGR = 14.8%
RMS = -1.82, RF = 1.33

Current CAGR last 5 years, 2001 to 2005: 4.82%
Average CAGR 2001 to 2005: 7.49% (Ave CAGR Price ~$38.00)
EPS Growth 2001 to 2005: 10.8%
Dividend Growth 2001 to 2005: 20.5%

Ave CAGR Price: $43.36
Earnings Valuation Trading Range: $31.92 to $46.01
Graham Intrinsic Value: $43.50
S&P Fair Value: $34 w/in 12 months

Potential Sell Prices at Ave CAGR of 16.9%:
               Ave CAGR Price   +1 RMS Price
December 2005      $43.36          $50.68
December 2006      $50.80          $59.24
December 2007      $59.39          $69.26

Investment Expectations/Timeframe
$38/share -> 20% within a year

Reason(s) for Recent Share Price Decline
Oct 31 - reduced 1Q earnings due to higher fuel, pension, supply costs.

Efficiencies in delivery/distribution systems (redistribution centers), acquisitions, more profitable sales paradigm, namely new client relationship model. New market: home meal replacement industry.

Dominant player in food services industry. Only 15% of market, room to grow through acquisition. Emphasizing high-margin products (Sysco branded) and relationships with independent customers (higher margin).

2006: low earnings growth due to higher expenses from setting up new distribution system and moving to new client relationship model. Earnings from 2006 to 2007 should increase by 15% once these improvements kick in. High transportation costs, though these have decreased somewhat over the past month or so. Higher pension costs.

Things to Watch
Fuel cost, effectiveness of new distribution centers, effectiveness of new client relationship model, acquisition efficiency, success of new product introductions, ability to pass on rising costs to customers, pension costs,...

Most Important Buy Factor(s)
Expectation of 20% gain within 1 year, bigger gain in 2007. Increasing dividend. Relatively low-risk with limited downside since all the negatives seem to be priced in.

What Others Say

Add'l Analysis

Background info, pros/cons/risks: S&P Report, analysis dated Nov 08, 2005
16-year CAGR: mklein site -
5.5-year CAGR: divebomber spreadsheet, 5.5 years
EPS, dividend, yearly price ranges for valuation: S&P report for SYY

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