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The Restaurant industry is effectively closed, and the analyst community will not adjust estimates for the big industry players. When the machines get the signal that forecasts for SYY are signaling a disaster, it will be a problem for the stock.
One of the most significant issues facing SYY that we believe is under appreciated and not in the stock price is the potential loss of 130,000 to 160,000 customers! Importantly, a considerable number of them will be permanent.
Some other things to keep in mind:
- It will take time before consumers feel comfortable eating at a restaurant again.
- COVID-19 is flushing out the excesses in the restaurant industry, and SYY will pay the price.
- The company has more leverage in FY2020 than in 2008-2010; debt as a % of total assets was 24% in 2010 and is now 49.3%.
- Accounts receivable DSO’s spiked YoY in 1H20 (customers going bankrupt) and will be a significant headwind for the foreseeable future.
- Will the company respond to help its customers financially?
- Operating margins are 120bps lower from the peak in 2010 and headed lower.
- The consensus estimate for FY2020 EBITDA of $3.7 billion is 10-15% too high. If we assume the number comes in closer to $3.4 billion, and we apply a 2008/2009 multiple of 6x NTM EV/EBITDA, the stock could easily trade at $25 representing nearly 50% downside from current levels.
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