5 Reasons to Love Saputo’s Expansion Strategy

Saputo (TSX: SAP), Canada’s largest dairy processor, is continuing to set its sights on markets outside of Canada. Here’s why this is good for investors.

1. It provides new opportunities to build market share

Saputo sees the need to build its business beyond its home base. There’s only so much growth potential in the Canadian market. As TD Securities analyst Michael Van Aelst said, “The near-term outlook for organic profit growth remains very challenging in Canada.”

2. It enables the company to focus on new U.S. opportunities

In 2013, Saputo acquired Morningstar Foods. Lino Saputo Jr., Saputo’s CEO,  has said that strong acquisition opportunities exist in the American market. The Morningstar Foods acquisition, now called Saputo Dairy Foods (USA), complements the company’s cheese operations in the U.S. The dairy foods division produces a broad variety of dairy and non-dairy extended shelf-life products.

3. It gives it a position in Australia

In February 2014, Saputo announced that its offer for all the issued shares in Warrnambool Cheese and Butter in Australia closed. Under the offer, Saputo acquired a relevant interest of 87.9% of Warrnambool’s shares. A supplier of low-cost raw milk, Warrnambool operates two manufacturing plants and produces a range of dairy products for Australian and export markets.

4. The Australian acquisition positions the company for exports to China and Taiwan

Warrnambool is close to Asia, one of Saputo’s chief export markets. As Saputo noted in its 2013 annual report, “We believe in the importance of embracing a global perspective for long-term growth.”

5. Saputo has the capacity for more foreign expansion

Saputo’s CFO, Louis-Philippe Carriere, previously stated, “With low debt levels and almost no off-balance-sheet arrangements, and taking into account the profitability of businesses to be acquired, I estimate we could add about $2.7 billion in additional debt while continuing to comply with our existing covenants.”

Consider that other Canadian food processing companies are looking beyond Canada to gain market share. High Liner Foods (TSX: HLF) acquired American Pride Seafoods in 2013. This acquisition strengthens and complements its market leadership rank in the value-added frozen seafood industry. In 2011, High Liner acquired the U.S. subsidiary and Asian procurement operations of Icelandic Group.  Icelandic is one of the largest suppliers of value-added seafood to the U.S. food service market.

Gaining market share via foreign acquisitions is a good strategy for Saputo. I believe Saputo’s bold strategy is a good long-term play for the company and its shareholders.

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Fool contributor Michael Ugulini owns shares in High Liner Foods.

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