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Yields & Deals--Strength of Sysco, PFG stocks tapped to enhance performance, growth initiatives;

Sysco Corp., Houston, and Performance Food Group (PFG), Richmond, VA, have put to good use opportunities available to them as public companies.

Sysco availed itself of a Securities and Exchange Commission (SEC) extension of an order enabling companies to buy back their own stock without the usual restrictions on volume and timing. The SEC move was aimed to help markets recover from the September 11 terrorist attacks. Thus, the nation?s largest broadliner authorized the repurchase of 18.5 million shares, including 2.5 million remaining from a prior, 16-million share repurchase approved in November 2000.

"Sysco has experienced double-digit earnings per share increases for the past six fiscal years (before an accounting change), and our sales growth outperformed the industry growth during that same time period," comments Charles H. Cotros, chairman and ceo. "In addition, our fiscal year-end long-term debt to total capitalization ratio of 31 percent is the lowest since fiscal 1996."

The decision by the board recognizes Sysco's strong balance sheet, favorable cash flow position, and "confidence in management?s ability to continue to achieve the market share gains and operating efficiencies," he further notes.

At the same time, Merrill Lynch & Co.upgraded Sysco from "accumulate" to "buy," as a defensive stock. "We want to own high-quality defensive growth names in these uncertain times," the Wall Street analyst indicates in a research note. A recent share price pullback at Sysco presents a "rare opportunity" to buy the industry leader in the "recession-resistant foodservice industry."

Merrill Lynch was looking for internal sales growth of 4.5 percent for Sysco in its first fiscal quarter ended September 29. The national broadliner, which rang up $21.8 billion in its last fiscal, did better than that: The company reported internal growth of 5.32 percent for this period. However, 3.67 percent was attributable to food cost inflation, as compared with 1.65 percent for real sales growth. Reduced demand in hotel, resort and convention business as a consequence of the terrorist attacks impacted volume, according to Cotros.

Meanwhile, PFG used its muscle as a successful public company to raise $307 million from stock and bond offerings, to finance its recently completed acquisition of Fresh International Corp (Fresh Express), Salinas, CA. The offering consisted of 5.7 million shares of common stock at $26.36 per share and $201.25 million of 5 -percent convertible subordinated notes due 2008. The purchase of the $509-million leader in fresh-cut produce was made for approximately $302.6 million in cash, which includes the repayment of net debt outstanding, and the assumption of certain liabilities. An additional $10 million will be payable upon the achievement of certain operating targets.

At the same time, PFG, which had $2.6 billion in sales last year, indicated it will meet third-quarter analyst earnings expectations. However, growth in sales will not be as strong as anticipated, reflecting both general economic conditions during the quarter and consequences of the September 11 tragedy.

"Fortunately, we have been able to offset the impact of the slower growth in sales with improvements in productivity and lower interest costs, to be able to meet the analysts' consensus estimate for the third quarter," comments C. Michael Gray, president and ceo.
The market appears to approve of PFG's recent moves. Credit Suisse First Boston, New York, announced coverage with a "buy'' rating and a $36 price target. In addition to PFG?s position among top players in a "consolidated industry with positive secular drivers," the distributor?s acquisition of Fresh Express is accretive to earnings and returns, according to the analyst. Credit Suisse anticipates earnings growth for PFG of 22 percent this year and 28 percent next year.


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