Morningstar | Market Pressures Continue to Weigh on Saputo's Margins; Shares Still Expensive
Unfavorable dairy market conditions weighed on narrow-moat Saputo's fiscal first-quarter results, with adjusted EBITDA margin contracting 290 basis points to 9.4%, below our full-year expectation of around 10.6%, on 13% revenue growth. Revenue growth was primarily driven by higher volume related to the Murray Goulburn acquisition (two months of results included in sales), which boosted sales in the international segment by more than 110%. However, sales in the firm's core Canada (31% of sales this quarter) and U.S. (49%) markets remained tepid, growing around 1% each. In Canada, lower export prices for dairy ingredients weighed on performance. Similarly, lower U.S. dairy ingredient market prices partly offset the positive impact from higher average market prices per pound of butter (up 5% over the prior year period) and cheese (up nearly 0.7%). We think Saputo's dependence on dairy market prices is evidence of the commodified nature of its fare, supporting our view that material pricing power will remain elusive. Management noted the challenges it has been facing in passing on pricing to North American customers, given a lack of pricing increases across the competitive landscape.These challenging market conditions, coupled with higher warehousing and logistics costs, led to adjusted EBITDA margin contraction in Canada (down 130 basis points to slightly above 10%) and the U.S. (down 280 basis points to below 10%). While we may temper our near-term margin outlook, we expect this revision to be more than offset by adjustments for the time value of money. As such, we don't expect a significant change to our CAD 32.50 fair value estimate and are reiterating our longer-term outlook for low-single-digit organic growth and around 11% adjusted EBITDA margin (comparable to fiscal 2018) on average over the next five years. Even with the shares' mid-single-digit pullback after the earnings announcement, we view Saputo as overvalued.
Saputo produces, markets, and distributes an array of dairy products including cheese, fluid milk, extended shelf-life milk and cream products, cultured products and dairy ingredients. Co.'s products are sold in several countries under brand names such as Saputo, Alexis de Portneuf, Armstrong, COON, Cracker Barrel*, Dairyland, DairyStar, Friendship Dairies, Frigo Cheese Heads, La Paulina, Milk2Go/Lait's Go, Neilson, Nutrilait, Scotsburn*, Stella, Sungold, Treasure Cave and Woolwich Dairy. Co. operates its business through three sectors, the Canada Sector, the USA Sector and the International Sector.
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