After reading the bullish opener, I think my Foolish counterpart thoroughly identified what makes SYSCO (NYSE:SYY) a profitable, dominant industry player. But he did little to answer my key concerns about the company's future, and his contention that this is an "opportunity to buy a great company at a discount price" leaves me slightly queasy.
Yes, SYSCO has grown and bought its way into an "enviable strategic position" at the top of the food-service industry. Yes, it operates in a "steady, predictable business" -- for the most part. And yes, its dominance "has translated into strong financial performance."
However, as Michael wrote, SYSCO is trading at about 21 times trailing earnings; in my opening, I estimated that it's trading at about 57 times trailing free cash flow. These multiples seem too high to me, given management's admission that industry growth is slowing. That's a roundabout way of saying that SYSCO itself will find growth harder to come by as time goes on.
Additionally, the near-term environment of food inflation looks challenging, and SYSCO will likely find it more difficult to pass along higher food prices to customers, especially those struggling with their own problems, such as noted client Wendy's (NYSE:WEN). Price increases played a big part in SYSCO's strong fourth-quarter results, making me doubt whether the good times will continue.
Not even a year ago, I questioned SYSCO's long-term growth ambitions. Although recent trends suggest it may be able to meet its goals of mid-double-digit earnings growth, I estimate that the current stock price already bakes this in. To make significant money for investors from here on out, SYSCO has to outperform what I'd already consider overly ambitious bottom-line goals.
Throw in high levels of capex, and there just isn't enough free cash flow to convince me that the stock is trading at a discount. I have more work to do on other names, but Kraft (NYSE:KFT) looks like a more interesting opportunity in the food industry, especially after Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) may have taken a recent stake in the company.
