Sysco Corporation (SYY): Is This Stock Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does SYSCO Corporation (NYSE:SYY) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Sysco’s story, and we’ll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at SYSCO Corporation (NYSE:SYY)’s key statistics:

Source: SYY Total Return Price data by YCharts.

Passing Criteria	3-Year* Change	Grade
Revenue growth > 30%	21.4%	Fail
Improving profit margin	(32.2%)	Fail
Free cash flow growth > Net income growth	2% vs. (5.2%)	Pass
Improving EPS	(3.9%)	Fail
Stock growth (+ 15%) < EPS growth	37.6% vs. (3.9%)	Fail

Source: YCharts. * Period begins at end of Q4 2009.

Source: SYY Return on Equity data by YCharts.

Passing Criteria	3-Year* Change	Grade
Improving return on equity	(30.2%)	Fail
Declining debt to equity	0.5%	Fail
Dividend growth > 25%	12%	Fail
Free cash flow payout ratio < 50%	98.6%	Fail

Source: YCharts. * Period begins at end of Q4 2009.

How we got here and where we’re going
Things do not look good for SYSCO Corporation (NYSE:SYY). The only metrics showing positive momentum are revenue and share price, but neither is good enough to earn a passing grade. Indeed, Sysco narrowly avoids a complete goose egg only because free cash flow hasn’t fallen into negative territory — but investors looking for stable dividends may be in for some frustration, as SYSCO Corporation (NYSE:SYY) is effectively paying out all of its free cash flow as dividends right now. Has this food-service leader given up on future growth, or is this just a low period before the company starts moving again in the right direction?

Last year, my fellow Fool Sean Williams pointed out that SYSCO Corporation (NYSE:SYY) should be able to outscale the problems of rising food costs that have plagued both farm providers and restaurant buyers. That hasn’t necessarily been borne out, as you can see below:

Source: SYY Operating Margin TTM data by YCharts.