Defensive stocks earn their name because they're usually a safe haven for investors in times of uncertainty in the markets. Unfortunately, higher raw material and energy prices are eroding profits at companies that are otherwise pretty well-insulated from economic fluctuations. That may be the case for SYSCO (NYSE:SYY), a huge player in commercial food distribution; its stock has gone basically nowhere for the past year.
Results for the fiscal first quarter didn't strike me as especially good or bad. Sales were up more than 6% despite moderating food price inflation, and gross margins were basically stable. However, operating margins dropped about two-thirds of a percent because of higher fuel, pension, and supply chain project costs. On the net income line, results were down 12% prior to a cumulative change in accounting methods and down about 8% even with the benefits of the change.
There were also a few other items that cast the quarter in a less positive light. First, the company seems to have lost a bit of market share. Second, volume at the northeast distribution center is ramping up more slowly than expected and won't reach full volumes until mid-'06, about half a year later than originally hoped.
Still, I don't see either item as a major problem for the long haul. Management is investing more in its sales force and actively engaging customers in business reviews as a means toward driving more sales. Given that many customers still use multiple vendors, increasing sales efforts could produce incrementally higher sales. On the distribution front, I don't think a six-month delay really invalidates the project's long-term potential benefits to margins.
SYSCO has consistently produced very strong returns on capital, and that's often a sign of a high-quality company with a meaningful competitive edge. To wit, SYSCO's ROIC is well ahead of comparable numbers at Performance Food Group (NASDAQ:PFGC) and Royal Ahold (NYSE:AHO) -- two of its largest competitors. Nevertheless, these shares still don't look like a major bargain to me. If they dropped another 15%, though, I might take a lot more interest.
Further food-related Foolishness:
- Is SuperValu Either?
- United Natural Foods: Healthy Eating, Healthy Stock?
- SYSCO: Great Company, Not-So-Great Stock
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
