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

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.