In a report published Tuesday, Barclays analyst Meredith Adler maintained an Underweight rating on SYSCO Corporation (NYSE: SYY ), while reducing the price target from $32 to $30.
SYSCO's deal with US Foods was called off leading to investor expectations of a retracement in the former's share price.
"Some investors are wondering why SYY's stock price has not retraced its steps now that the deal with US Foods is off. Yesterday's news was not a surprise to the market, of course, and even some level of stock buyback was expected ($3B was announced)," analyst Meredith Adler mentioned.
Although SYSCO's share price had appreciated by 11.8 percent after the announcement of the deal, the company has recorded meager earnings growth since then. "Management's commentary
yesterday gave us no comfort about the future," Adler added.
In the report Barclays noted, "The industry is growing 1% and the environment remains highly competitive. SYY has opportunities to boost efficiency and apply analytics to the pricing of big contracts, but no details were provided."
SYSCO's gross margins are expected to contract once the big benefit from category management is fully cycled. The company is unlikely to generate significant revenue growth to offset the hit to its earnings from growth in expenses and deterioration in gross margin.
The company expects to maintain the flexibility to grow through M&A. "…we expect SYY to show flat EPS growth and therefore continue to underperform our universe of stocks," Adler wrote.
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