It has been about a month since the last earnings report for Sysco (SYY). Shares have added about 1.9% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is Sysco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Sysco Q2 Earnings Surpass Estimates, Revenues Miss
Sysco Corporation reported mixed second-quarter fiscal 2019 results. Adjusted earnings of 75 cents per share dropped nearly 4% year over year, though it surpassed the Zacks Consensus Estimate of 72 cents. We believe that this could be partly accountable to higher interest expenses and costs associated with constant investments (particularly in the international unit). Also, the company continued to battle high supply-chain costs.
Nonetheless, this global food products maker and distributor’s sales of $14.8 billion advanced 2.5% year over year. However, the figure fell slightly short of the Zacks Consensus Estimate of $14.9 billion. This marked the company’s fourth straight quarter of top-line miss.
Gross profit improved 2.7% to $2,771.7 million in the quarter, courtesy of higher sales. Further, gross margin rose 4 basis points (bps) to 18.77%. Further, adjusted operating income rose 4.8% to $603.3 million.
U.S. Foodservice Operations
Segment sales advanced 4.2% to $10.1 billion, where local case volumes within U.S. Broadline operations increased 3.3% (including organic sales growth of 2.4%) and total case volumes ascended 2.9% (wherein organic sales increased 2%). Gross profit grew 4.5% to $2.0 billion, while gross margin rose 6 bps to 19.8%. Results were somewhat negatively impacted by food-cost inflation in U.S. Broadline, particularly in frozen potato, paper, meat, and produce categories. Operating expenses escalated 4.7% on account of increased supply-chain costs across warehouse and transportation. Nevertheless, operating income climbed 4.2% to $737.5 million.
International Foodservice Operations
Segment sales inched up 0.8% to roughly $2.9 billion. Foreign exchange fluctuations negatively impacted segment sales by 0.7% during the quarter. Gross profit dipped 1.6% to $589.9 million, while gross margin fell 49 bps to 20.4%. Adjusted operating income rose nearly 5.1% to $83.1 million, which included about 0.5% adverse impact from currency movements. Adjusted operating expenses declined 2.6%, though Sysco continued to face supply-chain related cost hurdles.
Sysco ended the quarter with cash and cash equivalents of $744.8 million, long-term debt of $8,019.8 million and total shareholders’ equity of $2,167.6 million.
During the first 26 weeks of fiscal 2019, the company generated cash flow from operations of $917.8 million and incurred net capital expenditure of $216.9 million. Free cash flow during the same period amounted to $700.9 million.
Sysco is pleased with its sales growth, while the company continues to make business investments (especially in the international unit). Also, Sysco is committed toward its cost-saving initiatives, which is expected to benefit the company further in the second half of fiscal 2019.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
Currently, Sysco has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Sysco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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