Sysco Corporation (NYSE:SYY) shares are up more than 0.81% this year and recently decreased -0.21% or -$0.13 to settle at $61.22. US Foods Holding Corp. (NYSE:USFD), on the other hand, is up 0.53% year to date as of 01/10/2018. It currently trades at $32.10 and has returned -0.40% during the past week.
Sysco Corporation (NYSE:SYY) and US Foods Holding Corp. (NYSE:USFD) are the two most active stocks in the Food Wholesale industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect SYY to grow earnings at a 10.61% annual rate over the next 5 years. Comparatively, USFD is expected to grow at a 18.30% annual rate. All else equal, USFD’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 13.44% for US Foods Holding Corp. (USFD). SYY’s ROI is 13.50% while USFD has a ROI of 6.80%. The interpretation is that SYY’s business generates a higher return on investment than USFD’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. SYY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.43. Comparatively, USFD’s free cash flow per share was +0.37. On a percent-of-sales basis, SYY’s free cash flow was -0.4% while USFD converted 0.36% of its revenues into cash flow. This means that, for a given level of sales, USFD is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. SYY has a current ratio of 1.40 compared to 1.40 for USFD. This means that SYY can more easily cover its most immediate liabilities over the next twelve months. SYY’s debt-to-equity ratio is 4.01 versus a D/E of 1.41 for USFD. SYY is therefore the more solvent of the two companies, and has lower financial risk.
SYY trades at a forward P/E of 19.47, a P/B of 14.44, and a P/S of 0.58, compared to a forward P/E of 18.20, a P/B of 2.62, and a P/S of 0.30 for USFD. SYY is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. SYY is currently priced at a -0.92% to its one-year price target of 61.79. Comparatively, USFD is 0.31% relative to its price target of 32.00. This suggests that SYY is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for SYY and 2.10 for USFD, which implies that analysts are more bullish on the outlook for SYY.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. SYY has a short ratio of 5.99 compared to a short interest of 2.39 for USFD. This implies that the market is currently less bearish on the outlook for USFD.
US Foods Holding Corp. (NYSE:USFD) beats Sysco Corporation (NYSE:SYY) on a total of 11 of the 14 factors compared between the two stocks. USFD generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, USFD is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, USFD has better sentiment signals based on short interest.