Sysco Corporation (NYSE:SYY), Up But Still Not A Buy

Sysco Corporation Is Not Exactly Pandemic Proof

When it comes to the best sectors for today’s investors the food-services and restaurant sector does not spring to mind. If anything, F&B and the companies that supply them are going to be under pressure for quite some time. Even with a vaccine, it will be years before the public is comfortable going out like it was before the pandemic struck. And that’s why it makes sense that shares of Sysco Corporation (NYSE:SYY) were among the hardest hit in during the selling. Now, months into the economic recovery, shares are still lagging the broader market rebound.

With competitor U.S. Foods Holding Corp (NYSE:USFD)  reporting better than expected results last week the hopes were high that Sysco, too, would produce a decent report. After all, the narrative for this earnings cycle is that companies are beating the estimates, the consensus for the full year is too low, and the outlook is improving. Unfortunately, Sysco was unable to meet the expectation.

Sysco Is A Company In Transition

Sysco, like its competitors in the foodservice distribution industry, is uniquely positioned to fell the full force of the pandemic. As an almost exclusive supplier to meals-away-from-home and institutional channels, its business was among the most hurt.

Restaurants across the spectrum were forced to close their doors and many have still not fully reopened. Those that have are operating at minimal capacity and doing their best to get by. Just about the only segment not to be impacted negatively is the fast-food segment and all too-man of those chains operate with their own supply lines. And, despite best efforts to mitigate the impacts, you can see this in the results.

On the top line, revenue came in at $8.87 billion. Sound good but not until you realize that’s down 42.7% from the previous year and over 800 basis points shy of consensus. Margins came in above consensus but so what? With revenue down so much EPS fell short of consensus as well, GAAP by a dollar, and both adjusted and GAAP earnings are negative. The only positive is that 4th quarter results were not so bad as to put the full-year earnings in negative territory.

Looking forward, the company is expected to see a rebound in earnings but not revenue. The consensus targets for revenue growth is down about 2.0% due to the lingering effects of COVID-19. Earnings will grow about 7% next year, decent enough but only about 60% of the pre-COVID targets.

Sysco Corporation: Dividend Growth Is In Serious Doubt

Syso has long been a steady and stable dividend payer. With its 49 year history of increases, it is verging on Dividend King status but I fear it may not come to pass. The company has yet to cut or suspend its payout and the likelihood of that is slim but there is a real chance it will skip the next anticipated increase. The current payout, a yield near 3.0%, is running at 90% of earnings leaving little room for leeway. The balance sheet is well-capitalized, great for the near-term, but there is a fair amount of long-term debt that could become a problem if the rebound is weaker or takes longer than expected.

The Technical Outlook: Beware, Sysco Corporation Is Approaching Resistance

The 2nd quarter news, for some reason, have shares on the rise. My best guess is the market thought results would be worse, or are reading too much into the restaurant rebound. There is a restaurant rebound underway but not all restaurants are coming back, those that fail are more than enough to impair Sysco’s results for the foreseeable future. Anyway, shares of Sysco are up more than 3.0% in late-day trading and look like they might keep rising … but there is risk.

Sysco price action is approaching a key resistance point, the high set post-correction. Because this high is well below the pre-COVID high, and Sysco’s outlook is very questionable, there is more than chance the bears are waiting there. A move to the high, near the $65 level, could easily spark another round of selling. I could be wrong, Sysco could be in for a rally, but I don’t see it and I’m not buying. There are too many other great opportunities to risk money on this one.