SAPUTO INC. $35 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; SI Rating: Average) is the largest dairy food processor in Canada. Its main brands include “Armstrong”, “Frigo” and “Stella”. Canada accounts for two-thirds of its revenue. Saputo also has dairy operations in the United States and Argentina.

Saputo’s revenue fell from $3.5 billion in 2002 (fiscal years end March 31) to $3.4 billion in 2003, but grew steadily to $4.0 billion in 2006. Income rose from $1.54 a share (total $160.2 million) in 2002 to $2.20 a share ($232.1 million) in 2005. However, a writedown cut Saputo’s earnings in 2006 to $1.82 a share ($192.1 million).

The company relies on acquisitions to fuel its growth. Although this adds to its risk, Saputo has a good history of quickly integrating new businesses and cutting their costs.

Saputo is now focusing on expanding to less regulated dairy markets outside of Canada. It recently agreed to buy a German specialty cheese maker for roughly $7 million. This is Saputo’s first operation in Europe, and should pave the way for future European expansion.

Saputo accounts for 6% of total U.S. cheese production. Higher prices for raw milk and lower cheese selling prices cut this unit’s profits in fiscal 2006 by 55%. The rise of the Canadian dollar also hurt earnings. However, changes proposed by U.S. dairy regulators could cut Saputo’s raw milk costs. Gradually rising cheese prices should also expand profit margins. Saputo will probably continue to expand its U.S. dairy operations, either through acquisitions or by opening new plants.

The company is also expanding its baked goods operations, which make snack cakes and tarts. These account for 4% of its total sales. In July 2006, it acquired a Quebec-based baked goods company for an undisclosed amount. The new operations will add $14 million to Saputo’s annual revenue.

Saputo has $91.5 million ($0.88 a share) in cash, and its long-term debt equals just 18% of equity, so it has plenty of flexibility to finance new ventures.

The stock got as high as $40 in July 2005, but has stayed in a narrow range since. It now trades at 16.1 times the $2.18 a share it should earn in fiscal 2007. The $0.72 dividend yields 2.1%.

Saputo is a buy.