The Dominion Bond Rating Service Limited (DBRS) has assigned new guidance to US foodservice giant Sysco Corporation, rating the company as AA (low) and R-1 (middle).
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Sysco operates in the stable, moderate growth, low-margin foodservice industry and has been a top performer in terms of earnings and sales growth.
About 25% of sales growth for the past 20 years has come from acquisitions as Sysco has been one of the main consolidators in this fragmented industry. Furthermore, the company is the largest in the industry, which provides the necessary buying power to remain competitive. If cash flow should weaken, however, Sysco has the flexibility to stop making acquisitions or completing share buybacks to maintain a healthy balance sheet.
The company has not recorded a decrease in sales or earnings for over 25 years, says DBRS, and is well positioned to continue this performance given that industry sales growth is expected to continue along historical trends and acquisition candidates remain.
DBRS warns however that while the industry is still highly fragmented, several large retailers (Wal-Mart and Ahold) have entered the segment and these will be a threat in terms of competing for accounts and driving up the price of future acquisitions.
In assigning the ratings, DBRS commented that the balance sheet has benefited from three main features. Firstly, cash flow has been steadily improving and has typically exceeded capital expenditures by over two times. In addition cash flow could retire total adjusted debt in well under two years. Secondly, the company has had a modest dividend payout ratio of about 30%, and lastly management of working capital has been strong.
These attributes, said DBRS should “allow Sysco to maintain low debt levels and an overall healthy balance sheet while still reaching its ambitious goal of US$50bn in annual sales by 2008 and continuing high share buybacks”.
