Investors Ready to Ride With Rykoff for the Long Haul
Two big Midwest investors see something intriguing in the long-suffering shares of L.A.-based Rykoff-Sexton Inc., a major food distributor to the restaurant business.
This week, Decatur, Ill.-based grain-processing giant Archer Daniels Midland Co. disclosed that it has picked up a 5.2% stake in Rykoff, or about 600,000 shares, accumulated in recent months.
ADM’s interest follows major Rykoff stock purchases during the past 18 months by the Wisconsin Investment Board, that state’s public employee pension fund. The Wisconsin fund now owns about 8.2% of Rykoff’s 11.6 million shares.
The ADM news sent Rykoff stock up $1.25 to $21.375 on Wednesday, although the shares slipped to $20.875 on Thursday.
Rykoff is purely an investment, ADM says--no takeover plans are afoot. Dick Burket, ADM’s investor relations officer, says Rykoff fits the mold of other companies in which ADM has taken substantial stakes in recent years: “We always like to look at things that we think are undervalued,” he says. Besides its Rykoff shares, ADM owns 15.5% of American Fructose, 9.4% of International Multifoods and 13.6% of railroad Midsouth Corp.
Rykoff has built a $1.4-billion (annual sales) business serving restaurants, cafeterias, hotels and airlines in all 50 states. The company distributes the bulk-package foodstuffs that restaurants and other food preparers use to make their meals. Rykoff also sells dinnerware, janitorial supplies and other goods that restaurants use.
Besides distributing brand-name food supplies, Rykoff also makes some of what it sells--things such as mayonnaise and shortenings.
Distribution isn’t a high-margin business: Rykoff’s net profit margin has generally been less than 2%. And in recent years, Rykoff has lived off a disappointing net margin of less than 1%.
Earnings peaked at $1.75 a share in the fiscal year ended April, 1989, then slid to 96 cents in 1990. In the year just ended, analysts figure that the firm made about $1.10 a share.
Why such uninspiring numbers? Rykoff has partly been a victim of the soft economy. If restaurant sales slow, which they have, Rykoff’s business slows too. It’s not for nothing that the company’s trucks have long been emblazoned with the slogan, “Enjoy life, eat out more often.”
But some analysts also believe that Rykoff CEO Roger Coleman has been running too centralized an operation, limiting the flexibility of the company’s field managers. Craig Carver, an analyst with investment firm John G. Kinnard & Co. in Minneapolis, notes that Rykoff rival Sysco Corp. has become the industry leader ($8 billion in sales) by decentralizing. Sysco’s earnings and stock price rose dramatically in the 1980s.
Its management structure notwithstanding, analysts also say Rykoff overpaid for some key acquisitions in recent years, including Tone Bros., a spice processor. And the firm seemed to lose its rein over expenses for a time, although cost-cutting appears to have things back in line.
Rykoff officials weren’t available to comment Thursday. Generally, the company doesn’t talk much publicly about itself or its plans--a fact that has turned off many analysts. “It’s very difficult to get information out of them,” Carver says.
Still, John Nelson, investment manager for the Wisconsin fund, believes that Rykoff’s business is a certain long-run winner. An economic recovery should boost the restaurant business near term, and the long-term trend is for Americans to eat more meals away from home, rather than fewer.
Most important, Nelson says, “they (Rykoff) have very good relationships with their customers.” Although he recently shaved his Rykoff stake by about 135,000 shares to 955,100, Nelson says the sale was made just to raise a little cash. Looking out a couple of years, he says, the additional earnings that Rykoff could generate from even minor sales gains is “dramatic. . . . That’s basically what we’re waiting for.”
For value hunter ADM, the purchase decision may have been more basic: Clinton Mayer, analyst at Bear, Stearns & Co. in New York, figures that Rykoff’s book value (the net value of its assets) is about $16 a share. So even at the current price of $20.875, Rykoff doesn’t sell much above book.
If the company can get earnings back to 1989 levels of $1.75 a share, the stock could head back to that year’s peak of around $30, or about 50% above today’s price. ADM and the Wisconsin fund, sensing an economic recovery in the wings, are willing to bet that Rykoff will deliver.
