Commodity Volatility To Continue To Overshadow Saputo’s Efficiency and Innovation Efforts

In our view, though Saputo has a broad presence across Canada, the US, Australia, Argentina, and the UK, it has limited control over profitability, tempering its ability to generate excess returns in a highly competitive industry. From where we sit, its commoditized products offer little differentiation from branded and private-label competitors, capping the firm’s ability to set or defend prices. Furthermore, with roughly 85% of its cost of goods sold coming from raw milk—a highly volatile input—unstable operating margins are likely to persist. Consumers, particularly during inflationary or weak economic periods, typically choose the lowest-priced dairy options given abundant substitutes and no switching costs. Saputo’s foodservice (33% of sales) and industrial customers (18%) similarly prioritize value, further constraining pricing power. Supplier consolidation in the US dairy market has also strengthened producers’ influence, which we believe leaves Saputo largely a price taker. As a result, we forecast the company’s average return on invested capital (including goodwill) to remain just under 10% over the next decade, a thin margin relative to our 8% weighted average cost of capital estimate.