SAPUTO INC. $29 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 207.2 million; Market cap: $6.0 billion; Price-to-sales ratio: 1.0; Dividend yield: 2.0%; SI Rating: Average) is Canada’s largest producer of dairy products, including milk, butter and cheese. It also makes snack cakes and tarts. Aside from Saputo, the company’s main brands are Neilson, Stella and Dairyland. The company also has operations in the U.S., Argentina and Europe.
In the three months ended December 31, 2009, Saputo’s earnings jumped 80.4%, to $104.3 million, or $0.50 a share. A year earlier, it earned $57.8 million, or $0.28 a share. That’s mainly because of contributions from its Neilson Dairy subsidiary, which Saputo bought from George Weston Ltd. (Toronto symbol WN) on December 1, 2008.
The higher earnings came despite a 20% increase in milk prices over the past year. (Milk is the main raw material of Saputo’s dairy businesses, which provide 98% of its earnings.) The company has been able to offset most of these extra costs by raising its selling prices for cheese in Canada.
Revenue fell 1.3%, to $1.50 billion from $1.52 billion a year earlier. That’s because cheese prices have fallen in the U.S. The higher Canadian dollar also hurt the contribution of Saputo’s U.S. dairy operations, which supply a third of its revenue.
The company is improving its efficiency in response to the lower revenue. As part of this plan, it will build a new Toronto warehouse to replace several other facilities. It will also close its dairy plant in Brampton, Ontario, and merge this plant’s operations with its other plants in the province.
In all, these moves will cost Saputo $4.6 million. However, the company expects the plan to save it $6.5 million a year.
The stock trades at 15.8 times the $1.84 a share that Saputo should earn in fiscal 2010.
Saputo is a buy.
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