No-Moat Saputo’s Q3 Results Look Appetizing, but We See Challenges Ahead; Shares Very Expensive

Saputo’s strong momentum extended through the third quarter, as reflected in its top-line growth of 17.6% (to CAD 4.6 billion), driven entirely by higher prices as volumes remained flat. While seemingly impressive at first blush (we’d normally expect a drop in volume with such pricing), it’s tough to obtain a clear view on elasticities. In this context, half of the sales increase (CAD 275 million) in the U.S. (47% of sales) was attributable to the positive impact from commodity prices, which aren’t directly linked to volumes. In Europe (6% of sales), however, management qualitatively suggested declining volumes. And we expect this trend will manifest across geographic segments (in line with management expectations) as cash-strained consumers will likely opt to purchase lower-priced private-label fare eventually (which dominate nearly 30% of the North American dairy aisle, per Euromonitor, versus the high-teens to low-20 levels that tend to characterize overall U.S. food and beverage). To the extent Saputo takes further pricing actions, this could further incite trade down given its commoditized product portfolio that lacks pricing power (thus, our no-moat rating). We intend to reevaluate our near-term forecasts, but our long-term view (low-single-digit top-line growth and high-single-digit operating margins) stays intact. Thus, we don’t expect a material change in our CAD 26 fair value estimate and view shares (which trade 40% above our intrinsic valuation) as overvalued.