Question:
In August, 2002 I bought Sysco Corp. on a Henssler recommendation. Part of the rational at that time was that the food services industry was fragmented & Sysco had been acquiring smaller operations. Since 2008 I have thought the depressed stock market may be an opportunity to accelerate those acquisitions. On Dec. 9 they announced the purchase of their largest competitor, U.S. Foods. The stock jumped from $34 to $43 then dropped back to about $36. I see contradictory analyses by Motley Fool, The Street and Seeking Alpha. SYY is a small part of my portfolio. I have a 26% profit. It is paying a 3.2% dividend. Should I sell, hold, or buy more?
Answer:
As pointed out, Sysco Corp. (NYSE: SYY) is a food service company delivering food to restaurants and hotels. They also provide personal care amenities, housekeeping supplies and room accessories to the lodging industry as well. We owned the company for many years, but we lost faith in management. The company is a habitual restructurer, continually promising better performance, but never seems to come through.
The company is reported to be paying $3.5 billion for U.S. Foods, which breaks down to $500 million in cash, $3 billion in stock. Sysco is also taking on $4.87 billion in debt. Sysco’s current debt is $3.2 billion, so this acquisition increases the debt to 152% of the original amount. Earnings are not likely to grow near as much. It’s unclear how much this acquisition changes the competitive landscape; however, the financing puts pressure on management to perform better than they have.
Both Moody’s and S&P put the company on watch for downgrade, the day the purchase was announced. We still don’t trust management, and it could really hurt your investment this time. We recommend you sell.
Question
My top four Henssler winners are Illinois Tool Works, 3M, Paccar and PepsiCo. Do you have any comments on those four?
Answer:
Illinois Tool Works (NYSE: ITW) is a manufacturer of industrial products, fasteners and components. The company’s expected long-term growth is 7.3%, and the stock has a price-to-earnings-to-growth ratio of 1.98. It is priced a bit high, but we continue to hold the stock believing growth will surprise, as sustainable growth is generally higher than current predictions.
We sold 3M Company (NYSE:MMM) in December 2012. The Post-It note maker’s long-term growth is projected at 9.8%, and has a PEG ratio of 1.87. The stock has a 2.62% dividend yield. We think the stock is a bit expensive when compared to its five-year ratios.
We sold Paccar Inc. (NASDAQ: PCAR) in 2009 in favor of Cummins Inc. (NYSE: CMI), which has been the better performer over that time period. We sold Paccar as they changed their business model. They were a designer and assembler of heavy trucks, but they went vertical and began making their own engines to meet regulations designed to reduce emissions.
PepsiCo Inc. (NYSE: PEP) has a projected long-term growth rate of 7.77%, and a sustainable growth rate 14.52%. The stock boasts a dividend yield of 2.92% growing at just less than 5% annually. PepsiCo is attractively priced relative to its five-year ratios.
Overall, these are all solid companies that still meet our investment criteria. However being that three of the four you mentioned are Industrial sector stocks, if any one position becomes more than 3% of your portfolio, we recommend trimming.
At Henssler Financial we believe you should Live Ready, and that includes understanding the fundamentals of the stocks you own. If you have questions regarding your holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
