Sysco Corporation (NYSE:SYY) shares are up more than 7.06% this year and recently increased 0.47% or $0.28 to settle at $59.56. United Natural Foods, Inc. (NASDAQ:UNFI), on the other hand, is up 3.75% year to date as of 12/05/2017. It currently trades at $49.92 and has returned 11.63% during the past week.
Sysco Corporation (NYSE:SYY) and United Natural Foods, Inc. (NASDAQ:UNFI) are the two most active stocks in the Food Wholesale industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
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 8.45% annual rate over the next 5 years. Comparatively, UNFI is expected to grow at a 3.95% annual rate. All else equal, SYY’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. 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 3.42% for United Natural Foods, Inc. (UNFI). SYY’s ROI is 13.50% while UNFI has a ROI of 6.90%. The interpretation is that SYY’s business generates a higher return on investment than UNFI’s.
The value of a stock is simply the present value of its future free cash flows. SYY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.43. Comparatively, UNFI’s free cash flow per share was +1.99. On a percent-of-sales basis, SYY’s free cash flow was -0.4% while UNFI converted 1.09% of its revenues into cash flow. This means that, for a given level of sales, UNFI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. SYY has a current ratio of 1.40 compared to 2.40 for UNFI. This means that UNFI 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 0.23 for UNFI. SYY is therefore the more solvent of the two companies, and has lower financial risk.
SYY trades at a forward P/E of 19.87, a P/B of 13.98, and a P/S of 0.55, compared to a forward P/E of 16.98, a P/B of 1.49, and a P/S of 0.27 for UNFI. 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
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. SYY is currently priced at a 5.73% to its one-year price target of 56.33. Comparatively, UNFI is 23.26% relative to its price target of 40.50. 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 2.90 for UNFI, which implies that analysts are more bullish on the outlook for UNFI.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. SYY has a beta of 0.53 and UNFI’s beta is 1.41. SYY’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. SYY has a short ratio of 5.99 compared to a short interest of 9.18 for UNFI. This implies that the market is currently less bearish on the outlook for SYY.
United Natural Foods, Inc. (NASDAQ:UNFI) beats Sysco Corporation (NYSE:SYY) on a total of 7 of the 14 factors compared between the two stocks. UNFI is growing fastly, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, UNFI is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, FBP has better sentiment signals based on short interest.