We consider if these are relevant measures to apply when evaluating the two food service juggernauts side by side and proceed to dig into their valuations. For the bottom line on this analysis, watch the video podcast segment below.
A full transcript follows the video.
This video was recorded on March 21, 2017.
Vincent Shen: David wrote in asking, "I would love to see a comparison between SYY and USFD," that's Sysco and US Foods, "specifically, revenue versus market cap and revenue versus net income, and how important those numbers are in establishing the appropriate value."
Sysco and US Foods, these are the two largest food distributors in the country in an otherwise very fragmented industry. When you think about restaurants, hotels, schools, hospitals, various places that prepare or serve food, those places need to get their supplies -- their produce, their meat, and other products -- supplied from somewhere. That's where these companies come in. Huge industry. I think industry research puts this sector at around $300 billion annually, in terms of supplying all these different restaurants and other food service businesses. What do you think?
Asit Sharma: It's a great question that David has, but my first thought is, why do you want to invest in this industry? [laughs] The profit margins are very low. Everyone knows that. Grocery stores have low profit margins, traditionally. Maybe a Whole Foods has higher margins because it sells specialty products. But if you think of the companies which supply food to institutions, etc, those margins are even lower, 1% to 2% in a year. So, that's my first thought.
But, let's read part of his question again. "I want to see a comparison, specifically revenue versus market cap." Let's pause right there. This is a nice question because in many cases of investing, there's not a really good relationship between revenue and market cap, meaning, what a company sells in a year and what its total value is on the stock market. But with these particular companies, it's actually significant, it makes a difference, the reason being, when you're running at a 1% to 2% margin a year, let's say you're selling $13 billion, $20 billion worth of food, but you only take home that 1% to 2%, then the amount that you sell suddenly becomes important. Both Sysco and US Foods are serial acquirers of business. Going back to our first question of the day, they do a ton of acquisitions. The reason is, that's the best way to grow sales. It's hard in this industry to go out institution by institution, hospital to university, etc, and spread your wares, versus buying up the smaller companies. So, when you're selling at these margins, and you're acquiring more companies, it becomes important to see what an investor will pay for your sales.
This is really the crux of David's question. He's asking about the revenue that these guys have, versus how it's valued in the market. I have some numbers to see how they stack up. Sysco -- listeners, this is not to be confused with Cisco the tech company -- has a market cap currently of about $28 billion. And its trailing 12-month revenue is about $54 billion. If you take that market capitalization, that stock market value, divide it by the revenue, you get 0.52. So, we think of that market cap to revenue multiple of being 0.5. Now, US Foods is a much smaller company, as Vince said. It's also giant, but relatively speaking. It has a market cap of just under $6 billion, and it has trailing 12-months revenue of about $23 billion. That's a capitalization to revenue of 0.25. In the screens that you'll encounter when you research your investments. You'll see this more commonly expressed as price to sales. So then you have the price to sales of Sysco as 0.5, and the price to US Foods as 0.25, a half versus a quarter. I'm going to throw it back to Vince and ask him to interpret these numbers for us, and we'll move on from there.
Shen: It's really interesting to see, I think, especially when you look at some other sectors. If you're listening to Dylan's show, for example, and looking at some of the really hot tech companies that come out, in terms of things like price to sales, or some of the multiples that you see, they'll be much more generous than this, and I think, again, it comes down to some of the great points that you made, Asit, in terms of this being an industry where, Sysco's bottom line net margin is around 2%, US Foods is around 1%, really tight here, just like if you think about your local supermarket. I think that when you are in this business, the way the companies in this space compete, I can tell you, having worked in the restaurant industry for many years with my family's business, customers, ultimately, want a large variety of items to choose from, they want deliveries that are on time, they want good, consistent quality. And, of course, they want all of that at low, competitive prices.
As Asit mentioned, the scale is really important here, because, for example, the more foods Sysco can procure from their own suppliers -- and they work with thousands of companies procuring different items -- they're able to win those volume savings, and they can translate that to more competitive pricing for the customers. Then, you combine that with some of the incredibly complex logistics of having to store inventory safely, being able to deliver it all over the country to these various establishments, and there's a lot of efficiencies and savings that can be sought out in operations, as well. Overall, I think, for these two companies here, you're definitely just looking at the numbers between Sysco and US Foods, even though US Foods, in terms of their top line, only generates half of what Sysco does -- about $54 billion of revenue for Sysco versus $23 billion for US Foods. That ratio there, 0.5 to 0.25, I would generally interpret US Foods, just on that metric, as being the better value, arguably.