Saputo Earnings: Inflation Buoys Top-Line Growth, but We See Bumpy Road Ahead; Shares Rich

Despite no-moat Saputo’s SAP solid fiscal 2023 fourth-quarter results, shares plummeted 11%-12%, as management alluded to a murky fiscal 2024 outlook due to softer demand and an unfavorable commodity environment. Still, we don’t plan a material change in our CAD 26.50 fair value estimate, and we view shares as overvalued. We’ve held that the market is overly optimistic about Saputo’s ability to reach its fiscal 2025 target of CAD 2.125 billion adjusted EBITDA, overlooking the volatile nature of the commodity market and the firm’s lack of pricing power, which underpins our no moat rating. Our fiscal 2025 adjusted EBITDA forecast sits below CAD 2 billion.

Higher prices boosted revenue, which shot up 12.9% to CAD 4.47 billion, as volume remained flat. While Saputo’s volume has held firm despite several price hikes in recent quarters, we don’t attribute such results to the firm’s pricing power or the strength of its portfolio. Rather, we think broad-based inflation, which the firm has passed along to consumers, and improved fill rates in its U.S. arm (47% of fiscal 2023 sales) helped offset the hit to volume. For reference, in the U.S., prices of dairy and related products increased by a low-teens rate on average from January to March, per the U.S. Bureau of Labor Statistics, comparable with Saputo’s 12.9% top-line growth. Further, we believe ongoing inflation will eventually push more consumers to trade down to lower-price offerings (particularly as Saputo competes in the dairy aisle, where private label controls nearly 30% in the U.S.), a shift recently highlighted by several U.S.-based packaged food firms. We maintain a low-single-digit annual sales growth forecast longer term.

We are pleased to see that Saputo continued to recover its EBITDA margin, up 220 basis points to 8.8%, primarily as its U.S. sector saw 450 basis points expansion to 6.9%. For this, we point to the firm’s prudent efforts to streamline its asset base and extract costs out of its business.