Numerous Inflation Cost Headwinds Challenge No-Moat Saputo’s Margins; Shares Fairly Valued

While pricing initiatives supported Saputo’s 5.2% top-line growth (to CAD 15 billion, including CAD 58 million from acquisitions and negative CAD 307 million from USD/CAD exchange rate) in fiscal 2022 (March year-end), the dairy processor closed the year with an adjusted EBITDA margin of a mere 7.7%, down 260 basis points versus the prior year. In this context, while volume held up across the geographic regions, pricing actions undertaken during the quarter failed to curb heightened input costs, labor shortages, and the negative spread between the block price of cheese and cost of milk faced by the operator. Margin deterioration was particularly pronounced in the U.S. segment (down 54.8%, 43% of sales), with negative spread contributing roughly 37% of the downdraft, indicating Saputo’s vulnerability to volatile market conditions. While management announced that it would selectively raise prices as the situation warrants, we posit such efforts will drag down volume, given its highly commoditized product portfolio that lacks pricing power, which underpins our no-moat rating. In addition, we deem continued price hikes would ultimately prompt consumers to trade down to lower-cost private-label offerings—which dominated 33% of the dairy category in North America in 2021, versus the less than 4% share held by Saputo, per Euromonitor.