The Buckingham Report

Once upon a time there was a hare who, boasting how he could run faster than anyone else, was forever teasing tortoise for its slowness. Then one day, the irate tortoise answered back: "Who do you think you are? There's no denying you're swift, but even you can be beaten!" The hare squealed with laughter.

We are all know who had the last laugh in this tale and I was reminded of this particular Aesop’s Fable when the 2005 annual reports of Sysco Corp (SYY) and Cisco Systems (CSCO) coincidently showed up in my in-box on the same day last month.

Now many folks are likely very familiar with the computer networking Cisco with a ‘C’. After all, the company says: “Cisco Systems is the worldwide leader in networking for the Internet. Today, networks are an essential part of business, education, government and home communications, and Cisco Internet Protocol-based (IP) networking solutions are the foundation of these networks. Cisco hardware, software, and service offerings are used to create Internet solutions that allow individuals, companies, and countries to increase productivity, improve customer satisfaction and strengthen competitive advantage. The Cisco name has become synonymous with the Internet, as well as with the productivity improvements that Internet business solutions provide. At Cisco, our vision is to change the way people work, live, play and learn.”

I would be willing to wager that few have even heard of the foodservice products company Sysco with an ‘S’. As the company states: “Sysco is the largest foodservice marketing and distribution organization in North America, providing food and related products and services to approximately 390,000 restaurants, healthcare and educational facilities, lodging establishments and other foodservice customers. Sysco's operations, supported by 47,500 associates, are located throughout the United States and Canada and include broadline companies, specialty produce and custom-cut meat operations, Asian cuisine foodservice distributors, hotel supply operations and chain restaurant distribution subsidiaries.”

Not surprisingly, given that computer networking has been a hot sector over the past decade, Cisco with a ‘C’ has been a fast growing company, the fallout of the bursting of the tech bubble notwithstanding. Revenue has skyrocketed from $4.1 billion in fiscal 1996 to $24.8 billion in fiscal 2005 and operating earnings per share have soared from $0.15 in 1996 to $0.87 in 2005.

Growth at Sysco with an ‘S’ has hardly been punk , as revenue has climbed from $13.4 billion in fiscal 1996 to $30.3 billion in 2005. Yes, you read that right, Sysco sells more stuff than Cisco! Operating earnings have also seen a steady advance, rising from $0.37 per share in 1995 to $1.47 in 2005 with not one down year in the past decade.

 
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The charts above compare the growth in revenue and earnings for both companies. Clearly, it is obvious that Cisco has enjoyed far greater overall growth on both accounts, even as Sysco has seen much more consistent growth. For what it is worth, from where I sit, Cisco looks a lot like the rabbit hopping up and down and Sysco looks a lot like the turtle plodding along in this version of The Tortoise and the Hare.

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Of course, as Aesop teaches, slow and steady often wins the race and the tortoise has prevailed in the SYY vs. CSCO share price appreciation derby over the past decade. Looking at total return calculations as of November 15, 2005, you would have been better off over the past 10 years had you owned non-sexy Sysco with an ‘S’ than Wall Street darling Cisco with a ‘C’. The chart below details the annualized total return of both stocks for one, two, three…on up to ten years. Only in the one- and three-year time frames did CSCO outperform

 
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We concede that had you been a buyer of the initial public offering of Cisco with a ‘C’ back in early-1990 you would have enjoyed a phenomenal total return of 21,392%, or 40% per annum, easily besting the 1,126% (16.6% annualized) return of Sysco with an ‘S’ over that same period. However, the former was already a favorite with investors back in 1995 when the time span of this particular study commences. As such, CSCO shares were then richly valued, while stock in SYY was relatively inexpensive. This helps to explain why shares of the latter could outperform, even as revenue and earnings did not grow as fast.

The moral of the story, as with every yarn we spin, is that investors should pay much more attention to the valuations of the stocks they choose to buy. Yes, it is great to invest in fast-growing companies, but not if you overpay for the shares.

Speaking of paying attention to valuations, although we are not yet ready to buy either stock at present, believe it or not, we think Cisco with a ‘C’ is the better value today. Interestingly, CSCO, which we argue has better long-term growth potential, now trades for about 18 times trailing-12-month earnings while SYY sports a current P/E ratio of 21. The tortoise may have won the race over the past 10 years, but my money is on the hare to be the victor over the next decade!

The information contained herein is believed to be reliable. However, such information has not been verified by us and we do not make any representations as to its accuracy or completeness. Neither the information, nor any opinion expressed, shall be construed to be or constitute an offer to sell or a solicitation of an offer to buy any securities. Opinions expressed are those of John Buckingham, which are subject to change and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice. Past performance is no guarantee of future results.

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About Al Frank Asset Management

Al Frank Asset Management, Inc. (AFAMI) is an Investment Adviser, registered with the Securities & Exchange Commission and notice filed with the State of California, is editor of The Prudent Speculator (TPS) newsletter, editor and publisher of The Prudent Speculator TechValue Report (TVR) newsletter, and is the Investment Adviser to two value oriented no-load proprietary mutual funds.

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