While food-service company SYSCO (NYSE:SYY) doesn't have a lot in common with its sound-alike cousin in the router business, there are still at least two similarities. Both companies dominate their respective markets and both stocks are accorded a great deal of respect for that dominance.
With its second-quarter results out, though, the question is whether SYSCO is beginning to slip.
Sales for the December quarter were up just over 4%, while earnings per share climbed almost 6%. Look deeper, though, and that growth wilts like old lettuce. Acquisitions added 0.7% growth and food inflation chipped in another 3.8%. If you strip those out, so-called "organic" sales were actually down on a year-over-year basis.
Even though sales were hurt by the fact that Christmas and New Year's fell on Saturdays in the December quarter, slowing growth is not a new issue. Despite a compounded historical revenue growth rate of more than 10%, this makes the fourth-straight quarter in which revenues grew below that hurdle once rising food costs were stripped out of the numbers.
SYSCO absolutely dwarfs its competitors, and that's part of the problem. While the old quote "trees don't grow to the sky" is a cliche, it happens to also be true. Almost half of the food served in the company's target markets is already provided by SYSCO. As a result, there's just not a lot of opportunity to grow the business outside of acquisitions.
Americans continue to dine out in increasing numbers, but the actual annual gain is less than 2% a year. Unless SYSCO can find a way to increase its penetration into its existing accounts, it will be difficult for the company to continue to grow much above that baseline rate. While SYSCO's margins are still more than twice as large as competitors Royal Ahold (NYSE:AHO) and Performance Food Group (NASDAQ:PFGC), there just isn't a lot left that SYSCO can do to juice the bottom line.
SYSCO has been a remarkably consistent grower, with 28 straight years of record sales/earnings, and that consistency is not forgotten by Wall Street. Though not out of line with its historical range, SYSCO shares trade at nearly 24 times trailing earnings. With growth apparently on the decline, that multiple could come under pressure. While SYSCO has often been a safe haven from the market's schizophrenia, it's up to each investor to decide just how much they want to pay for that security.
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Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.
