Saputo’s Emerging Market Play

An investment in a growing market pays off for this Canadian dairy giant.

| More on:
The Motley Fool

If you follow Saputo (TSX: SAP), Canada’s largest dairy company and one of the largest dairy processors in the world, you probably know that it has operations in an important South American market, Argentina. But Saputo’s most significant territory worldwide, one that it treats as an emerging market for all practical purposes, is actually the United States. Saputo invests in the States in the same manner that other companies plow resources into countries such as China and India.

Morningstar recap and the effect on earnings
On January 3, Saputo completed the acquisition of Morningstar Foods, a subsidiary of U.S. foods giant Dean Foods. In its last fiscal year before the acquisition (2012), Saputo booked $6.93 billion of revenue. With the acquisition, Saputo’s annual revenues are expected to increase to more than $8.6 billion. So far, folding in Morningstar has fueled impressive comparisons to the same quarter last year: revenue is up 28%, and net earnings have climbed more than 12%.

Proximity and sour cream
Before the Morningstar acquisition, Saputo already owned appreciable operations in the U.S., having bought a number of dairies and cheese companies over the past seven years, the most notable of which was the purchase of the cooperative Land O’ Lakes’ West Coast industrial cheese business in 2007. Saputo likes to acquire operations even closer to home. The relative proximity of major U.S. dairy states Wisconsin, Michigan, and Minnesota enables the company to exchange best practices with its acquired dairies, such as DCI Cheese and Alto Dairy, which are both located in Wisconsin.

The Morningstar deal opens up new avenues for revenue due to Morningstar’s expertise in “Extended Shelf Life,” or ELS products. These non-dairy items include ice-cream mixes, creamers, and half-and-half. The purchase also gives Saputo the all-natural, cultured products “Friendship” dairy, which is well known for its sour cream, and boasts the No. 1 cottage cheese brand in New York State. Saputo’s management undoubtedly liked this deal for the numerous ways it supplements its cheese business, a traditional strength of the company.

A shot in the arm at just the right time
Just how important has the U.S. market become to Saputo? In the current fiscal 2014 fiscal year, it will most likely overtake Canada in providing more than 50% of company revenues. The growing contribution of U.S. revenues can be seen in the following chart.

Over the last five business quarters, the “U.S.A. Sector” has grown from $581.5 million in Q1 2013, to $1.05 billion in Q1 2013, an increase of more than 81%. The same is true of earnings before taxes, depreciation, and amortization, or EBITDA, which has grown from $70.8 million to $112.6 million over the same period (an increase of 59%):

One observation can be drawn from both charts: without U.S. revenues and the aggressive development of business via acquisition, results would surely have disappointed, as the Canada and International sectors basically exhibited flat revenue and earnings over these five quarters.

Looking ahead
In its earnings release earlier this week, Saputo expressed some caution about earnings for the rest of the fiscal year. Analysts did not like this uncertainty, and had even higher expectations for earnings post-merger, thus, the stock sold off a bit. Foolish investors may want to take a step back and take into account the fact that Saputo has been able to grow its top and bottom lines despite a difficult domestic market. The long-term outlook is still quite positive.

Next stop: Latin America?
Numerous opportunities for expansion exist in the U.S. In its 2013 annual report, the company stated that it still has an “appetite for growth” through more acquisitions. In addition, during Saputo’s earnings conference call earlier this week, CEO Lino Saputo stated that U.S. dairy and cheese concerns in the pattern of Morningstar still make sense. That’s not to say the company won’t consider purchases within the more traditional definition of emerging markets. When pressed by an analyst, Saputo cited Brazil as an example of a country that holds promise for future mergers.

Looking for more stock ideas?
Does Saputo’s success snapping up companies south of us have you wondering about U.S. stocks? The S&P 500 index has returned 18.5% year to date, versus flat performance of the TSX Composite Index. For guidance on diversifying into some of the best stocks our neighbor has to offer, check out this free report by clicking here!

Asit Sharma does not own shares of any companies mentioned.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Target. Stand out from the crowd
Dividend Stocks

The Best Stocks to Buy With $1,000 Right Now

Canadian Natural Resources stock and another reliable dividend stock could be best buys for high investment return right now.

Read more »

oil tank at night
Energy Stocks

The Best Canadian Energy Stocks to Buy for Dividends

Even growth investors will want to have these high-yielding energy stocks on their watch lists.

Read more »


Buy the Dip: 3 Stocks to Buy Today for a Big Profit in 5 Years

Here are three Canadian stocks you can buy now at a discounted value and hold for the next five years for big…

Read more »

Businessman holding AI cloud
Tech Stocks

Before You Buy NVIDIA, Here’s an AI Stock I’d Buy First

NVIDIA (TSX:NVDA) is a great company, but one TSX AI stock is a better value.

Read more »

Dots over the earth connecting the world

Canadian Stocks Set to Dominate the Global Market

Here's why I would personally overweight Canadian stocks in my portfolio.

Read more »

stock research, analyze data

2 Top TSX Stocks I’m Considering Buying in September 2023

Bank of Montreal (TSX:BMO) and Canadian Pacific (TSX:CP) are intriguing TSX stocks worth consideration, even as they recover off their…

Read more »

Stocks for Beginners

Canadian Investors: 2 Oversold Canadian Stocks to Buy Now

These Canadian stocks continue to trade in oversold territory, creating a prime opportunity for investors to pick them up today.

Read more »

Make a choice, path to success, sign

2 TSX Stocks to Buy This Month — and 1 to Avoid

Are you interested in buying stocks this month? Here are two you should consider and one you should avoid in…

Read more »