EUR 850.00 For Business Accounts Only

Morningstar | Long-Term Outlook for Saputo Intact After in Line 3Q Results; Shares Look Overvalued

Narrow-moat Saputo posted third quarter results that largely aligned with our expectations, with revenue up 18% (largely driven by the Murray Goulburn acquisition) and EBITDA margin contracting around 150 basis points to 9.0%, versus our 21% and 8.9% full-year estimates. Top-line performance in Canada (30% of revenue) remained muted, with sales growing just 0.2% as an increase in selling prices for milk and positive mix effects were largely offset by lower volumes of fluid milk. This supports our contention that Saputo’s operations in a competitive and largely commodified environment have limited its ability to amass material pricing power. In the U.S. (47% of sales), sales increased by 5.5%, thanks to higher dairy food sales as well as contributions from the acquisitions of Montchevre (closed in December 2017) and F&A Dairy Products (closed in November 2018). However, challenging market conditions slightly mitigated top-line gains in this region, with lower average market prices per pound for cheese and butter. We aren’t expecting a material change to our CAD 33 fair value estimate or longer-term outlook, which calls for above 6% sales growth (including the Murray Goulburn acquisition) and high-single-digit operating margin on average over the next five years, and suggest investors wait for a more favorable entry point.

Lower international selling prices for cheese and dairy ingredients, coupled with ongoing cost pressures for warehousing, logistics, and transportation, continued to weigh on profitability in the firm’s core markets. As a result, EBITDA margin contracted 140 basis points to 10.7% in Canada and 240 basis points to 7.3% in the U.S. However, we believe improving margins in the International segment (EBITDA margin expanded 40 basis points to 10.1%) due to cost savings from the Murray Goulburn acquisition, as well as the firm’s ongoing efforts to drive efficiencies across its manufacturing and supply chain, should bolster profitability longer term.