Notorious activist investor Nelson Peltz‘s Trian Partners has initiated a 7% stake in the food distributor SYSCO Corporation (NYSE:SYY), as revealed in a new filing with the SEC. The position contains around 42 million shares and makes Trian the largest individual shareholder of Sysco. The filing added that Trian has engaged in discussions with the company’s President and Chief Executive Officer, William J. Delaney, and with Non-Executive Chairman of the Board of Directors, Jackie M. Ward. The investor plans to conduct further discussions and considers that the company should pursue certain changes in its strategy, which would enhance the shareholder value. Moreover, the investor expressed its interest for requesting a seat on Sysco’s board of directors. Meanwhile, the stock jumped by 6% on the back of the news.
The move comes only a couple of days after SYSCO Corporation (NYSE:SYY) reported its financial results for the fourth quarter and full fiscal year 2015, ended on June 27. The company delivered a 0.9% annual increase in sales to $12.4 billion during the fourth quarter, while its adjusted EPS went up by 6.1% on the year to $0.52. Meanwhile, analysts expected EPS of $0.51 on revenue of $12.67 billion for the fourth quarter. For the full fiscal year, SYSCO posted revenue of 48.7%, up by 4.7% on the year and its EPS advanced by 5.1% to $1.84.
However, SYSCO Corporation (NYSE:SYY)’s GAAP profit for the fourth quarter slumped by 72% on the year to $0.12 on the back of termination of the merger agreement with US Foods, which involved the payment of $300 million in break-up fees to US Foods, as well as $12.5 million to Performance Food Group, which earlier had agreed to buy US Foods facilities in 11 markets. The merger agreement was terminated after the U.S. District Court in Washington D.C. granted the Federal Trade Commission’s request for a preliminary injunction to block the merger between US Foods and Sysco.
With the involvement of Nelson Peltz, it is highly likely that Sysco will pursue other transactions. Knowing Peltz’s track record, the investor might even push for a split of the company. Sysco operates in a number of segments, of which the two main are Broadline and SYGMA. Sysco’s subsidiaries operating in Broadline segment are involved in the distribution of a line of food products, as well as non-food products, while SYGMA companies distribute food and non-food products to chain restaurant customer locations. The company’s latest 10-Q report for the third quarter of fiscal 2015, showed that Broadline contributes to the largest portions of Sysco’s sales and operating income, which amounted to 81.1% and 96.3% for the quarter, respectively.
Therefore, Peltz’s involvement in SYSCO Corporation (NYSE:SYY) leaves a lot of room for speculations and rumors. Peltz is a famous activist, who is always in the spotlights on the back of his activist campaigns involving companies like E I Du Pont De Nemours And Co (NYSE:DD), PepsiCo, Inc. (NYSE:PEP), and Mondelez International Inc (NASDAQ:MDLZ). Peltz obtained board representation and has been pushing for spin-offs in most of his campaigns and proxy fights.
Follow Nelson Peltz's Trian Partners
As a general rule, the involvement of an activist investor increases the popularity of a company and motivates piggybackers to buy shares. The data show that usually activist hedge funds generate returns higher than their passive peers, by pushing companies for changes capable of unlocking shareholder value. Hence, smaller investors try to get a piece of the action and go long on the back of an activist campaign. However, there is an even easier way to mimic not only activist investors, but the hedge fund industry as a whole. Through extensive research, we determined that most popular small-cap ideas of a select group of investors can beat the market by double digits per year. Based on this research, we compiled a strategy that involves imitating 15 most popular small-cap stocks among hedge funds. This approach has generated cumulative returns of over 123% since August 2012 and beat the market by around 65 percentage points (see more details here).
When it comes SYSCO Corporation (NYSE:SYY), it looks like hedge funds have been bullish prior to Peltz’s involvement. At the end of March, a total of 37 funds from our database held around $2.13 billion worth of stock, representing around 9.5% of the company. During the first quarter these numbers surged from 24 funds holding only $1.93 million in stock. Another shareholder of Sysco with a substantial stake is Donald Yacktman’s Yacktman Asset Management, which added 2.56 million shares and raised the stake to 33.96 million shares during the second quarter. Ric Dillon’s Diamond Hill Capital also inched up its holding to 6.31 million shares during the same period.
With this in mind, taking into account a bullish sentiment from hedge funds and an activist campaign on the horizon, it looks like SYSCO Corporation (NYSE:SYY) represents a profitable bet for the long-term. We will monitor Peltz’ further moves and will keep you updated.
Disclosure: none
