While I've been known to dabble in the kitchen, there can be no doubt that my mother's superior culinary skills are not genetic. The art of cooking seems to be lost on the younger generation. Let's have a show of hands: Who out there prefers mom's cooking to that of your significant other?
My intention is not to incite marital strife, but to point out that home-cooked meals seem to be a rarity these days, with trips to places such as Applebee's (NASDAQ:APPB) filling in the slack. While the trend toward eating out has been an obvious boon to the restaurant industry, it also has been beneficial to the distribution companies that supply those eateries with their meat and potatoes.
Food titan Sysco (NYSE:SYY), not to be confused with the less-savory Cisco Systems (NASDAQ:CSCO), is the nation's largest distribution company, with a $25 billion market capitalization that exceeds the 10 closest competitors combined. The Houston-based company keeps the pantries of more than 420,000 restaurants, schools, hotels, and hospitals fully stocked. A staff of in-house food inspectors and marketing associates helps ensure overall quality and customer satisfaction. Sysco keeps cashing in on the fact that everyone has to eat; the company has posted record sales and earnings for 27 consecutive years.
Another solid quarter is now in the books. Third-quarter earnings, released this morning, were in line with estimates, rising 16% to $195.8 million on a 10% increase in sales to $7.03 billion. Inflation of food prices, which has been running in the upper single digits, was partially responsible for the gain, though higher prices are generally expected to abate eventually. One notable exception is the dairy segment, where milk has reached record highs. More efficient delivery routes were also a contributing factor, reducing operating expenses from 15.1% to 14.4%.
Though food-distribution profit margins have been notoriously anemic, Sysco's immense size and streamlined distribution network have expanded net margins by 100 basis points within the past five years to 3.1%, double the industry average. Last year, free cash flow grew by 40% to $938 million. The impressive credentials, though, have not escaped investors' attention. The stock trades at 28 times forward earnings. Nevertheless, Sysco's 2003 sales of $26 billion account for only 13% of the $200 billion global food-service market, so there is plenty of room left to grow.
Hungry for tasty discussions? Come chow down on one of our Food & Drink discussion boards. There's something for everyone.
Fool contributor Nathan Slaughter enjoys cooking and has a great crawfish etouffee recipe. He owns none of the companies mentioned.
