Is Saputo’s Growth Saturated?

Saputo is one of the top ten dairy processors in the world, processing nearly 11 billion liters of milk into a variety of cheeses and a wide range of dairy products every year. The company engages in the production, marketing, and distribution of a wide array of dairy products such as cheese, fluid milk, extended shelf-life milk and cream products, cultured products, and dairy ingredients.

Saputo is the largest cheese manufacturer and the leading fluid milk and cream processor in Canada.  The company also has a huge international presence with operations in the U.S. being the largest. With 63 manufacturing facilities, Saputo operates its business through four sectors: USA (42% of adjusted EBITDA in 2020), Canada (27%), International (21%), and Europe (10%). The company sells its products in over 50 countries and enjoys leading market shares in Australia, the USA, and Argentina.

Saputo operates an umbrella of market-leading brands such as Saputo, Armstrong, Dairyland, Devondale, Frigo Cheese Heads,  Treasure Cave, and Montchevre, etc.

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Investment Data
 

Revenue Growth & Market Exposure

Saputo sells its products to a wide range of customers like supermarket chains, convenience stores, specialty cheese boutiques, independent retailers, restaurants, food processors, etc.

The retail segment constitutes over 50% of its total revenues, followed by food service (~30%) and industrial (~20%). Saputo has diversified its earnings base and is deriving a larger share of its revenues from other geographical zones including Europe in the last two years.

Saputo ranks among the top three cheese producers in the US, the top dairy processor in Australia, and the second largest in Argentina. It is one of the largest producers of extended shelf-life and cultured dairy products in the U.S and the largest manufacturer of branded cheese and a top manufacturer of dairy spreads in the UK. Saputo has successfully established strong relationships with suppliers across the entire value chain.

The company is known for its offering of a variety of dairy products recognized for their quality and taste. Customers trust the Saputo brand given its six decades of experience in the food industry. In order to retain and attract new customers, the company also offers a range of organic, low sodium, and low sugar dairy products for health-conscious consumers. 

In addition to reinforcing its presence in emerging markets, developing new markets, and expanding existing ones, the company is growing organically as well as through acquisitions. It has a good track record of successful integrations and has completed 32 acquisitions since 1997. These acquisitions have helped Saputo grow rapidly in Canada, the USA, Argentina, Australia, and the UK. Its revenues have grown at more than 8% CAGR in the last decade. 

Saputo is benefiting from increased sales volumes in the retail and industrial market segments but witnessed lower sales volumes in the foodservice market segment. The company is well-positioned to cater to the shifting consumer demand due to the COVID-19 pandemic. Saputo continues to develop innovative product offerings adapting to new consumer trends, such as take-out for in-home dining. It expects less volatility in the dairy commodities market for the remainder of FY 2021, and in the start of FY 2022.

Dividends

Saputo is a Dividend Aristocrat and has a history of growing dividends, increasing them by more than 9% CAGR over the last decade. The stock yields a modest 1.8% but has grown its dividends each year since 1998. It also has a reasonable payout ratio of 47%. Saputo last raised its dividend by ~3%. The company has no intent to repurchase shares for FY 2021. 

Saputo has a strong balance sheet and enjoys financial flexibility due to a high level of cash flows generated by operations and a low debt position. It targets to return 30%-35% of net earnings to its shareholders in dividends. Its EPS has also grown at 11%+ in the last decade.

Saputo has successfully strengthened its global business and consolidated its position as one of the leading dairy processors in the world. The company is expecting its bottom line to grow in line through operational efficiencies and by reducing costs. Saputo’s strategy of acquiring similar businesses across geographies is also bearing fruits and positions it well for the future.

The company will only be focusing on investing in organic growth and strengthening business operations and brands in the current scenario. It captured opportunities arising from the increase in consumer demand in the retail market segment given a large portfolio of retail brands and an adapted product offering. Saputo has enhanced its online direct-to-consumer strategies such as The Saputo Fridge in Canada and has also expanded its home delivery zone. 

Saputo continues to invest in increasing consumer loyalty, as well as in the diversification of its product portfolio and in brand recognition initiatives. A large international footprint, leading brands, quality products, and a smart acquisition strategy position the company to be a leader in the dairy space.

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Competition

Saputo manufactures approximately 32% of all Canadian natural cheeses. In order to retain its leading position in the challenging dairy industry, the company has a strong focus on cost management and operational efficiency.

The food processing industry is extremely competitive, and Saputo is one of Canada’s top players in the dairy industry along with two other major competitors. Several regional, national and multinational players compete with Saputo in the USA, Argentina, and Australian dairy markets.

Bottom Line

Saputo is a consumer defensive stock. The company has smartly diversified across geographies through strategic acquisitions, which have contributed positively to its earnings. It is targeting accelerated organic growth across all its platforms over the coming years.

Given its huge international footprint, decades-long existence, and large product portfolio, the company should retain its leading position in the industry and continue its dividend growth streak in the future.

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