Shares of Saputo Inc. (TSX:SAP) are down 10% in the past month and long-term investors are wondering if they should book profits and move on or take advantage of the weakness to buy the stock.

Let’s take a look at the current situation to see if Canada’s largest dairy company deserves to be in your portfolio.


Saputo’s recent stock slide is connected to a weaker-than-expected earnings report. For the fiscal year ending March 31, the company delivered year-over-year EBITDA gains of 2.8%.

Adjusted earnings in the quarter were $127.2 million, a 168% drop from the previous quarter, and adjusted earnings missed analyst expectations by a wide margin.

Saputo says cheese prices dropped by 30% in the quarter compared with the same time in 2014 due to a decrease in imports of dairy products by China and Russia, a situation the company says could continue into 2016.

In the Canadian market, the company said competition over the past year increased to levels not seen in a decade.

Cost management

Saputo incurred higher costs in the latest quarter due to delays encountered in the completion of a new distribution centre located in Quebec. The problems caused a spike in logistical and warehousing expenses.

Saputo operates 55 plants and is implementing programs to reduce costs and improve margins as it rides out the tough market conditions.

International expansion

Saputo has been on a buying spree as it seeks growth in international markets. The company has purchased two Australian companies in the past two years, the largest being a $450 million cash deal to win control of Warmambool Cheeses and Butter Factory Co.

Saputo is also setting its sights on Brazil, where the market is ripe for consolidation. This would make sense given Saputo’s strong foothold in neighboring Argentina.

While earnings are tough to come by in Canada, the international division is doing very well. The company reported adjusted EBITDA of $122.3 million from its foreign operations, a 31.2% increase over the previous year.

Should you buy Saputo?

The company has generated fantastic returns for long-term shareholders. The stock has doubled in the past five years and more than tripled over the past decade.

Saputo has a very strong balance sheet, remains very profitable, and has the right management team in place to make the strategic acquisitions at reasonable prices in high-growth markets.

Long-term investors should view any further weakness in the stock as a good buying opportunity.

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Fool contributor Andrew Walker has no position in any stocks mentioned.