SAPUTO INC. $50 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 197.2 million; Market cap: $9.9 billion; Price-to-sales ratio: 1.4; 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. Saputo operates in the U.S., Argentina and Europe.
In its fiscal 2013 third quarter, which ended December 31, 2012, Saputo earned $130.0 million, or $0.65 a share. That’s up 0.2% from $129.8 million, or $0.64 a share, a year earlier. Revenue was unchanged at $1.8 billion. Unfavourable currency exchange rates offset the positive impact of higher cheese prices in the U.S. The company’s Argentinian division also sold fewer products at lower prices, which weighed on Saputo’s overall earnings.
These results do not include privately held Morningstar Foods, which Saputo bought for $1.4 billion in January 2013. Morningstar makes milk products, including cream, ice cream and cottage cheese, at 10 plants in the U.S.
Morningstar will immediately add $1.6 billion to Saputo’s annual sales. Saputo mainly makes cheese in the U.S., so this purchase will also diversify its operations. As well, it will now get about half of its sales from the U.S. That’s a big plus, particularly if Canada opens up its dairy markets to foreign competition.
Saputo borrowed $1.2 billion to help pay for Morningstar. That increased its long-term debt to around $1.6 billion, but that’s still a low 16% of its market cap.
Morningstar also added $903.1 million to Saputo’s goodwill and intangible assets, bringing the total to $2.0 billion, or 20% of the company’s market cap. However, Saputo has a long history of successfully integrating new businesses and making them more profitable. That cuts the risk of a major writedown.
Saputo is also improving its long-term prospects by closing its cheese-making plants in Germany and the U.K. The company acquired these facilities in 2006 and 2007, but they are small, and they have had a hard time competing with larger, wellestablished cheese makers. Closing these moneylosing plants should increase the company’s annual gross profits by $1.5 million.
The company should earn $2.65 a share in fiscal 2013, and the stock trades at 18.9 times that forecast. That’s a high p/e ratio for company in the highly regulated dairy industry. The $0.84 dividend yields 1.7%.
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