Should you invest in Sysco, a US food supplier with booming sales?

Despite its rapid global expansion, Sysco, an American food distribution company, is still valued fairly

The best opportunities are sometimes found in well-run businesses that have made a name for themselves in less well-known but no less lucrative industries rather than in glitzy, rapidly expanding industries. Food distribution is an example of this, which entails ensuring that producers' ingredients and prepared meals reach both large institutional consumers like supermarkets and hospitals as well as wholesale customers like restaurants. Sysco (NYSE: SYY) distinguishes itself from the competition in this sector.

The secret to success in the low-margin food distribution industry is to keep expenses to a minimum. Being the biggest food distributor in the US, Sysco supplies almost one out of every five eateries and commercial kitchens nationwide, allowing it to take advantage of economies of scale to operate incredibly efficiently. This results in a 20 percent return on capital employed, despite operating margins of only 3 to 4 percent. The food distribution industry's incentive structure acts as a deterrent to prospective rivals, preserving market share and profit margins.

Is it advisable to invest in Sysco?

Sysco isn't sitting back and enjoying its success. Due to its international expansion strategy, it currently has operations in 90 countries. Due to this, it can further cut expenses by locating the least expensive food available worldwide and expand by breaking into new markets. Additionally, it has purchased food service businesses abroad, such as last year's purchase of Campbells Prime Meat, a Scottish supplier of meat and fish. Because of all of this, it is now the biggest food distributor in nations from Canada to the UK and the third-largest producer in France.

With international sales growing by an average of 17% annually since 2021 and overall earnings increasing by about 50% since that year, Sysco has a strong track record of growth. Over the same time frame, adjusted earnings have increased fourfold. Since 2019, profits have increased by a third, even if pre-Covid levels are used as a benchmark. In addition, it has consistently raised its dividend over this time, making it one of the few businesses in the sector to distribute profits to shareholders. It is still fairly valued, though, as it is only 16:7 times projected 2026 earnings and yields a dividend of 2:8 percent.

Even though Sysco has a long history of increasing dividends and earnings, the share price has had a mixed record over the last few years. Perhaps this is going to change. Over the last few weeks, the shares have gained strength, and they are currently trading above both their 50-day and 200-day moving averages. As a result, I would advise you to buy at the current price of £78.41 at 40 to £1. If that is the case, I would set the stop loss at £54.41, giving you a 960 total downside.