CFO Meetings Show Positive Outlook For Sysco (SYY) - Jefferies

Jefferies analyst, Mark Wiltamuth, hosted Sysco (NYSE: SYY) CFO Joel Grade for investor meetings and came away feeling better about the SYY outlook on an improved restaurant backdrop and additional labor and IT cost savings. No change to the Hold rating though as SYY’s earnings execution over the last few years has been inconsistent and he views valuation as elevated.

Recent synergies from acquisitions by Brakes and a planned shift in the UK to multi-temp DCs from a network of frozen/refrigerated/ambient single temp DCs should help reduce miles driven. The DC conversions are in early stages and are already beginning to bear fruit in terms of cost savings. While no quantification was given, we believe these internal synergies and projects should help keep Brakes' earnings growth on an upward plane over the next few years.

Drivers to recent increase in 3 year guidance:

1) US restaurant backdrop and better recent results: With restaurant industry revenues running in the 1-2% range, the company has notched better local case volumes (7 sequential qtrs. of improvement and now running 3%).

2) Incremental labor cost saving: With its guidance increase, SYY announced a 2% back office headcount reduction (though some of this was already contemplated in prior guidance).

3) Killing problematic SAP project reduces IT spend: SYY is pulling SAP from the 12 operating cos that had converted, and it will revert back to legacy systems, reducing overall IT spend and enabling more customer facing projects.

Deflation a headwind (more cautionary than peers): While other foodservice companies emphasize that their margin dollars are largely unaffected by meat deflation due to cents/lb. markups, SYY believes its business has a bigger mix of % margin and therefore deflation poses a sales and margin dollar headwind. Despite a 120bp deflation number in 2Q, SYY delivered $0.04 EPS upside and better than expected margins.

SYY shares currently trade at 21.7x C2016E EPS (vs. 5 yr. avg. of ~17x P/E). The analyst's $46 target assumes 20.5x P/E on 2017 EPS.

For an analyst ratings summary and ratings history on Sysco click here. For more ratings news on Sysco click here.

Shares of Sysco closed at $45.80 yesterday.

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