SAPUTO INC. $44(Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 199.2 million; Market cap: $8.8 billion; Price-to-sales ratio: 1.3; Dividend yield: 1.7%; TSINetwork Rating: Average; www.saputo.com) is Canada’s largest producer of dairy products, including milk, butter and cheese. It also makes snack cakes and tarts. The company operates in the U.S., Argentina and Europe.
In its fiscal 2012 third quarter, which ended December 31, 2011, Saputo’s earnings rose 15.8%, to $129.8 million from $112.1 million a year earlier. Earnings per share rose 18.5%, to $0.64 from $0.54, on fewer shares outstanding. Sales rose 17.1%, to $1.8 billion from $1.5 billion.
These gains mainly reflect the contribution of DCI Cheese, a specialty cheese distributor in the U.S., which Saputo bought for $270.5 million in March 2011. Higher selling prices for cheese in Canada and Argentina also contributed to the sales increase. However, the milk pricing formula in California recently changed; that’s hurting profit margins at Saputo’s U.S. operations.
The company often uses acquisitions to expand. That adds risk, but it has a long history of buying well-established firms—like DCI Cheese—and making them more profitable. Saputo’s focus on highquality businesses also helps cut the risk of expanding outside of Canada.
Mainly due to its acquisitions, Saputo now gets 40% of its sales and 35% of its earnings from the U.S.
The company can easily afford to keep making acquisitions. Its long-term debt of $380.9 million is a low 4% of its market cap. It also holds cash of $106.2 million, or $0.53 a share.
Saputo’s shares have gained 12% since the start of the year. They now trade at 17.7 times the $2.48 a share that the company probably earned in the fiscal year ended March 31, 2012. That’s a high p/e ratio for a company in a mature, highly regulated industry like dairy products. The $0.76 dividend yields 1.7%.
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