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Will Food Cost Deflation Dampen Sysco (SYY) Q3 Earnings?

Sysco Corporation SYY is set to report fiscal third-quarter 2016 results before the opening bell on May 2. Last quarter, this global food products maker and distributor posted positive earnings surprise of 17.07%.

The company beat earnings estimates in one quarter, missed in another and reported in-line earnings in two quarters, translating to an average positive surprise of 3.66%.

 

Let’s see how things are shaping up prior to this announcement.

Factors to Consider this Quarter

Sysco expects soft sales growth in the to-be-reported quarter due to the unfavorable impact of food cost deflation and currency translation. The company has witnessed 0.2% deflation in the first quarter and 1.2% in the second quarter of fiscal 2016. This trend has continued into the third quarter, and the company believes that deflation headwinds will persist for at least the remainder of the fiscal year, which means soft earnings growth will persist at least till fiscal 2016.

Unfavorable currency headwind is also putting pressure on sales and earnings, since Canada represents the majority of its international sales. The company continues to witness strength in the US dollar versus the Canadian dollar and the euro, which will hinder sales growth.

Nevertheless, it is encouraging that Sysco has delivered higher gross margins in the last three consecutive quarters, after witnessing declining gross margins since the last two fiscal years. It seems that the company’s growth strategy is paying off and its efforts to boost sales and margins are likely to impact the company’s results in the to-be-reported quarter.

Earnings Whispers?

Our proven model does not conclusively show that Sysco is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: The Earnings ESP for Sysco is 0.00% as both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 42 cents.

Zacks Rank: Sysco’s Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about a positive surprise.

We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Stocks in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Tupperware Brands Corporation TUP with an Earnings ESP of +0.90% and a Zacks Rank #1.

Church & Dwight Co. Inc. CHD with an Earnings ESP of +1.19% and a Zacks Rank #2.

Avon Products, Inc. AVP with an Earnings ESP of +50.00% and a Zacks Rank #3.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
TUPPERWARE BRND (TUP): Free Stock Analysis Report
 
AVON PRODS INC (AVP): Free Stock Analysis Report
 
SYSCO CORP (SYY): Free Stock Analysis Report
 
CHURCH & DWIGHT (CHD): Free Stock Analysis Report
 
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