Sysco trades at $89.11 and has moved in lockstep with the market. Its shares have returned 11% over the last six months while the S&P 500 has gained 7.2%.
Is now the time to buy Sysco, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Sysco Will Underperform?
We're sitting this one out for now. Here are three reasons you should be careful with SYY and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Consumer Discretionary - Distributors company because there’s a ceiling to what customers will pay.
Over the last two years, Sysco’s units sold averaged 1.1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. Projected Free Cash Flow Gains to Pump Profits
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Sysco’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 2.1% for the last 12 months will increase to 3.1%.
3. New Investments Aren’t Moving the Needle
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Sysco’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.
Final Judgment
Sysco falls short of our quality standards. That said, the stock currently trades at 18.8× forward P/E (or $89.11 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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