Sysco currently trades at $72.71 per share and has shown little upside over the past six months, posting a small loss of 3.7%. The stock also fell short of the S&P 500’s 7.1% gain during that period.
Is now the time to buy Sysco, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Sysco Will Underperform?
We're cautious about Sysco. Here are three reasons why SYY doesn't excite us and a stock we'd rather own.
1. Weak Sales Volumes Indicate Waning Demand
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Consumer Discretionary - Distributors company because there’s a ceiling to what customers will pay.
Over the last two years, Sysco’s units sold averaged 1.1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Free Cash Flow Projections Disappoint
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts’ consensus estimates show they’re expecting Sysco’s free cash flow margin of 2.2% for the last 12 months to remain the same.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Sysco’s ROIC averaged 2.6 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Sysco doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 15.2× forward P/E (or $72.71 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
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