Netherlands-based supermarket group Ahold sold last year's e3 billion rescue rights issue to investors on a simple premise: its US food distribution arm, which had been hit by an accounting scandal, could be turned around and made to perform more like its great rival Sysco. This seemed a better option than a distressed sale of the business.
If Sysco's results were any guide, Ahold's investors could expect a juicy return on their rescue investment. After all, the US group's 5% operating profit margin is the envy of other food distributors. Based on it, Sysco's shares have commanded a high valuation, sometimes trading on a multiple of more than 30 times forecast earnings.
But Sysco's past results might be a less reliable guide to its prospects than Ahold's investors once thought. Sysco has been investing heavily in its supply chain to beef up distribution centres. There's nothing wrong with that. The catch is that Sysco seems to have accounted for this investment in a way that temporarily flatters its profits now – at the expense of profits in the future.
What are the warning signs? The main one is how much Sysco charges against earnings for depreciation.