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Saputo Earnings: Consumers Sour on Saputo’s Undifferentiated Dairy Products; Shares Unpalatable

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Saputo Inc

We think no-moat Saputo’s SAP fiscal 2024 first-quarter results emphasize its vulnerability to commodity cost headwinds and inability to wield pricing power over its commoditized dairy portfolio. Revenue of CAD 4.2 billion (down 2.8%) and adjusted EPS of CAD 0.36 lag our full-year estimates of 3.8% growth and CAD 1.83, respectively; as such, we intend to reduce our near-term forecast. More critically, a volatile cost environment and macro pressures prompted Saputo to push its CAD 2.125 billion EBITDA target until after fiscal 2025. However, our model had already called for an elongated horizon over which to hit this mark, with the firm not reaching its aims until fiscal 2028. When taken with our unchanged long-term outlook (low-single-digit average sales growth and a high-single-digit EBITDA margin by fiscal 2033), we don’t plan a material change to our CAD 26.30 fair value estimate, rendering shares a touch rich.

Specifically, Saputo called out depressed volume across its geographic segments outside its home turf, particularly in its U.S. arm (45% of sales). Enhanced fill rates and service levels in this segment—both returned to the historical levels thanks to improved labor position and supply chain conditions—weren’t sufficient to subdue higher price elasticity, with lower volumes contributing to an 8.2% drop in segment sales. We posit this result lends credence to our belief that persistent inflationary pressures (and the ensuing price increases at the shelf this has afforded) will prompt consumers to turn to lower-priced private-label fare, which accounts for nearly one third of the U.S. dairy aisle.

On a positive note, EBITDA margin ticked up 60 basis points to 8.6%, which we attribute to Saputo’s ongoing efforts to modernize its facilities and implement cost-containment measures. Nonetheless, we don’t think such endeavors are sufficient to elevate the firm’s competitive standing; rather, we view these as required investments to keep pace with competitors.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Erin Lash

Sector Director
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Erin Lash, CFA, is director of consumer sector equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. In addition to leading the sector team, Lash covers packaged food and household and personal care companies.

Before joining Morningstar in 2006, she spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance.

Lash holds a bachelor’s degree in finance from Bradley University and a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. She also holds the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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