YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

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Hungry? Chances are that if you’re eating out, Sysco helped put your food on the plate. The Houston-based company is the single largest player in the $215 billion North American food-service business, distributing a variety of foods and dining supplies to a broad range of customers, including restaurants, hospitals, schools, and hotels. The company commands a dominant 17% of market share in the industry, so despite being in a low-margin business, Sysco has proved it can make high returns on invested capital without leverage. Their large market share also means Sysco has economies of scale and pricing power, which allow Sysco to have some of the best margins in the industry and an economic moat that puts those margins at low risk to change. In short, Sysco has the competitive advantage.

Some investors fear the future holds a trend toward dining in for decades to come as cash-strapped consumers worry about job security and lost value in their investment portfolios. Even if this trend would continue for such an unlikely length of time (after all, eating out is still one of the cheaper forms of entertainment), Sysco seems well positioned to cope with such a shift in spending due to its diverse customer base (no one customer makes up more than 10% of sales). Furthermore, the company has about 40% of its business outside the restaurant sector and in areas that are less economically sensitive, such as hospitals, military, and schools. Regardless, while the trend toward dining at home may look perilous at first glance, it could also prove to be an opportunity for the company to take more market share from its fragmented rivals.

Even if Sysco’s upside doesn’t reach full potential back to its historic 20+ P/E ratio, its fat dividend yield of nearly 4% will definitely provide a more satisfying meal along the way than just sitting in cash.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Mike Yacktman | March 08, 2011 | Permalink

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