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May 7, 2012

Stock of the Day

Recommendation: Hold

Welcome to the Stock of the Day for May 7, 2012. Lately, we have all been seeing higher prices at the grocery store, and while that puts the squeeze on consumers' wallets, higher food prices also affect the profit margins of food suppliers as well. Let's take a look at Sysco Corp. (SYY), one of the world's largest food distributors, and see how this company is coping with higher meat and poultry prices.

Company Overview: Sysco, which stands for Systems and Services Company, is a food distributing giant with more than 400,000 clients and 46,000 employees. Although it is best known for supplying meat and seafood products as well as specialty foods to institutional client, Sysco also offers management consultant services. Sysco brought in just under $40 billion in 2011 and its main competitors are privately-held Meadowbrook Meat Company Inc., Performance Food Group Co. and U.S. Foodservice Inc.

Industry Breakdown: With the third-largest market capitalization, Sysco Corp. is a significant player in the Food Wholesalers industry. This company also stands out in terms of its 3.9% annual dividend yield as well as its Price/Earnings to Growth ratio. The company's 26.4% return on equity is third-highest in the industry, while both its earnings growth and long-term growth rate come in at no. 8. However, when it comes to sales growth, this is a middle-of-the-road company.

Earnings Buzz: In the first quarter, Sysco Corp. dealt with 5.5% food cost inflation, driven largely by higher meat and poultry prices. Compared with the same quarter last year, sales climbed 8% to $10.5 billion, which slightly topped the $10.45 billion consensus estimate. Over the same period, adjusted earnings climbed 3% to $289.8 million, or $0.48 per share. Analysts forecast earnings of $0.43 per share, so the company posted a 12% earnings surprise. Investors were content with this earning announcement; shares of SYY climbed modestly at Monday's open.

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system.  This stock has oscillated between buy and hold territory over the past 12 months. All in all, this company has mediocre fundamentals; it is C-rated in terms of sales and earnings growth. In fact, Sysco Corp.'s only area of strength is its A-rated return on equity. This company is particularly weak in terms of its track record of earnings surprises. Additionally, buying pressure for this stock is lackluster. So, this stock receives a C-rating for both Fundamental Grade and Quantitative Grade.

Bottom Line: I recommend that you hold off on buying shares of SYY for now.

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