Today, we examine a growth stock that has done very well for us in the past and is likely to do so again. Saputo built itself into Canada’s largest producer of dairy products, partly through a series of successful acquisitions. The Trans-Pacific Partnership now under negotiation may hinder Saputo somewhat at first, but ultimately it will open up new markets for this expanding company.
Canada is now negotiating the Trans-Pacific Partnership, which would lower trade barriers between 12 countries in the Asia-Pacific region. The TPP could also open Canada’s highly regulated agricultural industry to foreign competitors.
That would hurt Saputo—at least initially—though the deal would also help the company export its products to more markets. Still, we feel the stock will make little progress until the TPP is finalized.
SAPUTO INC. (Toronto symbol SAP; www.saputo.com) is Canada’s largest producer of dairy products, including milk, butter and cheese. The company also operates dairies in the U.S., Australia and Argentina.
In its 2015 fiscal year, which ended March 31, 2015, Saputo’s sales rose 15.4%, to $10.7 billion from $9.2 billion in 2014.
That’s mainly due to Australian dairy producer Warrnambool Cheese and Butter Factory; Saputo paid $449.6 million for 87.92% of this business in February 2014. Warrnambool’s contribution helped offset lower cheese prices in fiscal 2015.
In March 2015, Warrnambool agreed to buy the business that cuts, wraps and distributes its cheeses from Australian dairy producer Lion Dairy & Drinks. The new business is located next to Warrnambool’s main plant, so there are plenty of opportunities to make both operations more efficient. However, constantly expanding by acquisition adds risk.
Excluding costs related to this purchase and a gain on the sale of its bakery business, Saputo’s earnings rose 2.0%, to $577.5 million, or $1.46 a share. In 2014, it earned $566.1 million, or $1.43.
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Growth stocks: Saputo reaps benefits of higher savings and a higher U.S. dollar
The company aims to keep expanding internationally, particularly in emerging markets like Brazil. It can easily afford more acquisitions: its long-term debt of $1.5 billion is just 13% of its market cap, and it holds cash of $72.6 million.
Meanwhile, Saputo is realizing more savings from the Warrnambool acquisition and is cutting costs at its U.S. and Canadian plants.
It also plans to spend $210 million to $250 million on new computer systems over the next five years. Once it completes these upgrades, it expects them to save it $20 million to $25 million annually. As well, Saputo is benefiting from the higher U.S. dollar; its American operations supplied 50% of its fiscal 2015 sales and earnings.
Higher savings and the strong U.S. dollar should increase Saputo’s fiscal 2016 earnings to $1.54 a share. The stock trades at 19.5 times that forecast. That’s a high p/e ratio in light of the company’s aggressive growth-by-acquisition strategy, which adds risk. The $0.52 dividend yields 1.7%.
Recommendation in The Successful Investor: a worthwhile HOLD
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