SAPUTO INC. $20 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 206.8 million; Market cap: $4.1 billion; Price-to-sales ratio: 0.8; SI Rating: Average) is Canada’s largest producer of dairy products including milk, butter and cheese. Its main dairy brands include Saputo, Stella and Dairyland. Saputo also makes snack cakes and tarts.
Saputo reached its current size mainly through acquisitions outside of Canada. Recent purchases include the west coast industrial cheese business of U.S.-based Land O’ Lakes Inc. for $249.2 million, and a Wisconsin-based cheese maker for $161.0 million. Saputo has also used acquisitions to expand to Argentina and Europe. Its international operations now supply about 40% of its revenue, and 30% of its earnings.
Expanding through acquisitions is riskier than internal growth. Saputo cuts this risk by identifying smaller, less efficient businesses that would benefit from its economies of scale and marketing expertise.
Saputo’s latest acquisition is Neilson Dairy, which is the dairy division of Weston Foods. Neilson makes and sells a wide variety of dairy products for the Ontario market. This business generates annual sales of $600 million.
Saputo paid $465 million for Neilson Dairy. To put that figure in context, it earned $69.0 million in its second fiscal quarter ended September 30, 2008, up 10.4% from $62.5 million a year earlier. Earnings per share rose 10.0%, to $0.33 from $0.30, on fewer shares outstanding. Sales grew 12.8%, to $1.45 billion from $1.3 billion.
The company held cash of just $14.9 million or $0.07 a share on September 30, 2008, so it had to borrow the money it needed to complete the takeover. Long-term debt of $234.1 million was less than its annual cash flow of around $400 million, so Saputo can comfortably afford to add debt.
The company is now streamlining some of its operations due to falling cheese prices. It plans to permanently close its cheese plant in Vermont, due to damage from a fire. The closure will cost Saputo $5.4 million U.S. Shifting production to other plants should cut annual expenses by $2.2 million U.S. by 2010.
The drop in cheese prices has hurt Saputo’s stock in the past few weeks. However, lower cheese prices could lead to new acquisition opportunities at bargain prices. The stock now trades at 13.0 times the $1.54 a share that Saputo will likely earn in fiscal 2009. The $0.56 dividend yields 2.8%.
Saputo is a buy.
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