Saputo Inc.: This Growth Story Isn’t Close to Being Over

When I think of a classic investing growth story, my mind will automatically wander toward sectors like technology, pharmaceuticals, or manufacturing the latest fad for consumers. These are industries that can easily be scaled up to meet increasing demand and usually have huge potential markets.

There are plenty of growth stocks in those sectors. But they often come with one huge risk — the fad factor.

Investors don’t need to look far for an example of what I’m talking about. In 2006, BlackBerry was the undisputed king of the smartphone world. The first iPhone came out a year later, and the rest is history. Today, BlackBerry has a very small share of the market.

This is why the Saputo Inc. (TSX: SAP) growth story is so compelling.

Let me explain.

After going public in 1997, Saputo grew and acquired its way to becoming Canada’s largest manufacturer of milk, cheese, butter, and yogurt. Then it acquired assets in the United States. It then moved on to Argentina, acquiring assets there. And finally, earlier this year, the company acquired Warrnambool Cheese and Butter, Australia’s oldest dairy company.

The acquisition party isn’t even close to being over. There are opportunities all over the world. On a conference call recently, CEO Lino Saputo Jr. identified a few different areas the company is looking at, including expanding its presence in North America, moving into Brazil either via its Argentinian operations or acquiring a local producer, or even expanding operations in Australia. New Zealand was also discussed as a potential market.

Expanding more into Australia and New Zealand would give the company easier access to a market that looks to be a huge source of business over the next number of years — China.

The thesis is simple. Compared to North Americans and Europeans, the Chinese aren’t much for dairy, consuming just 28kg per capita of milk products per year, compared to over 200kg per capita for the Western world. Even compared to other markets in Asia — like Japan and South Korea — the Chinese are still lagging behind, consuming about half as much per capita as their neighbors.

There are a couple of reasons for this. Since China has rapidly developed, it has millions of people who just couldn’t afford milk up until a few years ago. They’re used to going without it. Additionally, local supplies of dairy are often suspect, and recalls are common.

As the country continues to get richer and its middle class becomes more secure, consumption is bound to go up. Even if the country’s dairy consumption doesn’t catch up to its neighbors, it still represents more than a billion people increasing their milk consumption significantly. This is a huge potential market.

The company has plenty of cash available for making acquisitions, too. CFO Louis-Philippe Carriere has stated that the company has $3 billion-$3.5 billion in borrowing power available for any potential purchases.

The numbers speak for themselves. Since the end of the company’s 2011 fiscal year, revenues are up more than 50%, profits are up more than 20%, and its book value has increased by more than 30%. And that’s in just a few short years. Imagine the growth the company can put up in a decade or two.

Investors aren’t even paying a huge premium for this growth, either. The company is projected to earn $1.77 per share next year, which gives it a price-to-earnings ratio of 18.4. And as the company expands, it’s able to consolidate operations, which could potentially lead to even more growth in the bottom line.

Plus, the company pays a nicely growing dividend. Sure, shares only yield 1.6% at the moment, but investors have been able to count on an annual dividend increase since its IPO. Investors who purchased shares in 2000 are looking at a yield on cost of approximately 25%, to put the dividend growth in perspective.

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Fool contributor Nelson Smith owns shares of BlackBerry.

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