JP Morgan Comments On Sysco Corporation After Better Than Expected Earnings

Sysco Corporation SYY reported F3Q adjusted EPS of $0.46 vs. JP Morgan's $0.43 and consensus $0.41. The quarter was much better than 2Q, as higher volume growth was matched with expansion in gross margin dollars per case. This was particularly important after 2Q's deceleration in real sales coupled with gross margin contraction that suggested the company was not only losing share in a competitive market environment, but also unable to pass through commodity inflation. In contrast, F3Q's real sales growth of 2.8% vs. JP Morgan's 1.0% estimate and 1.0% last year came despite inflation of 5.1% vs. JPM's 4.0% estimate and 0.8% deflation last year. JP Morgan believes the high quality result and gradual traffic improvement in the restaurant space bodes well for improving case volumes/pricing ability. Still ongoing ERP investment and $212m annual cash payments for the IRS tax settlement in F11/F12 will constrain earnings growth and free cash flow through F12. Although the stock has underperformed the rest of JP Morgan's coverage by 45% since end-2009 through May-6, JP Morgan believes the run-up post 3Q earnings yesterday has brought the stock back to near fair value at 14.6x C12 EPS. JP Morgan maintains a price target of $32. SYY closed Monday at $31.57