Even With a Renewed Focus on Cost Management, Saputo Fails to Milk Durable Profit Gains

Despite Saputo's 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. More critically, we believe the lack of differentiation between its products and those of branded competitors and private label fails to suggest the existence of a brand intangible asset, a particular challenge when consumers face outsize strain on their pocketbooks during periods of macroeconomic malaise. The consolidation among dairy producers (that have amassed greater control over the price of raw milk) has constrained Saputo's standing, in our view. Suggestive of the firm's lack of competitive edge, our five-year forecast average return on invested capital (including goodwill) sits just above our 8% weighted average cost of capital estimate.