Lack of Pricing Power Could Make Margin Recapture Difficult for No-moat Saputo

While Saputo has an extensive portfolio of dairy products (spanning the cheese, cooking spray, and spreads aisles), its exposure to a highly commoditized industry means fluctuations in raw material prices (which account for up to 85% of Saputo’s costs) can limit the firm’s control of profitability from year to year. In our view, Saputo has not carved out an economic moat due to consolidation among dairy producers, which have amassed greater control over the price of raw milk. Further, we believe the lack of differentiation between its products and those of branded competitors and private label doesn’t suggest the existence of a brand intangible asset. As a result, we expect Saputo to generate low-single-digit revenue growth over the next 10 years (generally in line with the overall dairy market, which we expect to grow around 2%-3%) and an average return on invested capital (including goodwill) of 8.9% over the next 10 years (just a touch above our 7.9% weighted average cost of capital estimate).