The food distribution industry is offering different kinds of flavors for investors. Whether you prefer a succulent dividend giant like Sysco (NYSE:SYY), a sweet organics growth play like Hain Celestial (NASDAQ:HAIN), or a spicy specialized player like The Chefs' Warehouse (NASDAQ:CHEF), there is plenty on the menu to choose from.
The heavyweight champion
Sysco is the undisputed leader in the North American food service and distribution industry. The company offers approximately 400,000 products to nearly 425,000 customers in businesses like restaurants (60% of revenue), hospitals and nursing homes (10%), hotels and motels (5%), schools and colleges (5%), and other segments that together account for the remaining 20% of sales.
Management estimates that the company has a market share of 18% in a highly fragmented industry worth around $235 billion. Market leadership allows the company to gain market share from smaller rivals through prime access to new customers and acquisitions: Sysco has implemented more than 150 acquisitions over the last 40 years.
The company´s scale provides considerable advantages when it comes to supply chain and warehouse efficiencies. On the other hand, Sysco does not have the same kind of growth potential as smaller competitors: revenues increased by 5.7% during the last quarter and acquisitions contributed 2.3% to that growth.
Dividends are clearly one of the most compelling aspects to keep in mind when considering a long position in Sysco. The company pays a juicy dividend yield of 3.4% and it has had the financial strength to increase payments over the last 45 consecutive years. The payout ratio at around 65% of earnings is quite reasonable for a stable and mature company like Sysco.
Heavenly growth from Hain Celestial
Hain Celestial is a leading producer of natural and organic foods, drinks and personal care products. The company owns brands like Celestial Seasonings, Terra, Rice Dream and Greek Gods yogurt among many others.
Hain has been able to benefit substantially from growing demand for healthy products over the last few years. Thanks to a combination of organic sales growth and acquisitions, the company has compounded sales growth at 10.6% annually over the last five years, and earnings per share has grown at an even tastier 20.5% per year over that period.
The company continues firing on all cylinders as of the last quarter; Hain reported a big increase of 33% in revenue during the quarter to a record $477.5 million. Sales in the US increased by 10.5% year-over-year to $1.1 billion, while revenues in the U.K. jumped by a whopping 118.6% to $420 due in big part to recent acquisitions. The Rest of the World segment produced a 12.4% increase in revenue $218 million and adjusted earnings per share expanded by a healthy 27% during the quarter.
Hain does not have the same scale and financial strength as Sysco, but the company is in the right place to benefit from the trend toward healthier nutritional habits and has demonstrated an outstanding ability to effectively integrate acquisitions into its product portfolio to deliver substantial growth for shareholders over the years.
Delicious potential with the Chefs' Warehouse
The Chef´s Warehouse is a specialty food distributor focused on serving the specific needs of chefs at menu-driven independent restaurants, fine dining establishments, country clubs, hotels, caterers, culinary schools and specialty food retailers. The company aims to become a one-stop shop for chefs in the cities that set the culinary trends for the rest of the country.
The Chef´s Warehouse sources its products from many of the finest gourmet brands from more than 40 countries around the globe, and it relies on a knowledgeable sales force with extensive education and training in culinary matters. The company´s differentiated offerings, proprietary brands and unique relationship with chefs and culinary schools are key sources of competitive strength.
With a market capitalization of less $540 million, The Chef´s Warehouse is materially smaller than Hain Celestial, which has a market cap of $3.94 billion, and only a small fraction of industry giant Sysco with its market capitalization of $19.76 billion. This has negative implications when it comes to risk and financial resources, but it also means superior growth potential for the Chef´s Warehouse versus bigger competitors, even if the company targets a smaller specialized market
Business is booming lately: sales jumped by a whopping 36.7% to 170.6 million in the last quarter. Like its peers, The Chefs' Warehouse generates a substantial amount of growth via acquisitions, which contributed approximately $35.6 million, or 28.5%, to net sales growth for the quarter.
For investors willing to accept higher risk and volatility in exchange for oustanding potential for expansion, The Chef´s Warehouse may be the way to go.
Sysco is the undisputed industry leader with unmatched scale advantages and a rock solid trajectory of dividend growth through the years. Hain Celestial offers higher growth potential by providing exposure to the booming organics and natural products industry. The Chef´s Warehouse takes risk and potential to a higher level than Hain due to its small size and deep product specialization. Depending on investor´s risk tolerance and apetite for returns, there are different alternatives for everyone´s taste in the food distribution business.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Hain Celestial and Sysco. The Motley Fool owns shares of Hain Celestial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.