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Morningstar | Cost Pressures Continue to Hamper Saputo's Profitability in 4Q; Shares Not a Bargain

Narrow-moat Saputo's top line remained healthy in the fourth quarter, with sales up 17.9%, driven by acquisitions, but its profitability remained hampered by weaker international pricing for cheese and dairy ingredients, elevated warehousing and logistics expenses, and unfavorable currency effects, with adjusted EBITDA margin contracting 100 basis points to 8.5%. We don't anticipate a material change to our CAD 33 fair value estimate, as we had largely incorporated these factors into our bottom-line forecast, and the firm's full-year EBITDA margin of 9% matched our estimate. As such, we also plan to maintain our longer-term outlook of slightly below 3% sales growth, excluding the impact of recent acquisitions, including Dairy Crest, and high-single-digit adjusted operating margin on average over our 10-year forecast. We continue to think investors should wait for a more favorable entry point, even with a roughly 6% decline in shares after the earnings report.

Performance in Canada (30% of sales) remains lackluster, with fourth-quarter sales declining 5.7% because of lower fluid milk volumes (according to management, per capita consumption has fallen over the last year) and segment EBITDA margin contracting 130 basis points to 9.7%. Top-line results in the U.S. (48% of sales) were slightly more encouraging, with sales increasing 12.7% thanks to higher volumes and the F&A Dairy acquisition, but segment EBITDA margin still fell 60 basis points to 8.3% because of cost pressures (warehousing and transportation). Saputo's limited ability to take pricing to offset these cost headwinds reflects the challenging competitive landscape and the largely commodified nature of its offerings. However, management's efforts to strengthen its manufacturing footprint in Canada and achieve blue cheese manufacturing efficiencies in Wisconsin should support profitability over the near term.