The Motley Fool

3 Reasons Why I’m Long on Saputo Inc.

Saputo Inc.’s (TSX:SAP) stock has been on a nice, upward trajectory this year, but in my opinion the growth story is just getting started. Here are three reasons the company will continue to profit.

1. Dairy market outlook solid

Saputo’s main business is dairy, and the outlook for that business is solid. Even if overall, global economic growth stagnates we will continue to see an increase in the amount of middle class families in emerging economies such as China, where families are moving up the wealth chain, from rural, agricultural existences to urban lives. As these families gain more wealth, their diet changes and one of these changes has been and should continue to be, increased consumption of dairy. As dairy demand worldwide increases, dairy companies like Saputo will enjoy more sales.

2. Saputo’s effective growth strategy

The dairy market is competitive and for dairy processors to enjoy growth they have two basic options: attract customers from the competition, or to buy their competition.

Saputo has chosen to pursue acquisitions, and these acquisitions have so far been fruitful for the company. In fact, the company’s most recent quarterly results showed a 17% increase in earnings, with the company’s recent acquisition of a majority stake in Australia’s Warrnambool Cheese and Butter Factory Company Holdings Ltd., adding to the results.

Even before the ink dried on the Warrnambool deal, Saputo’s CEO told investors that he is eyeing more acquisitions to expand the country’s reach, especially in the U.S. and Brazil.

3. Geographical reach

Saputo may have started as a small, family-owned company in Montreal, but now the company has an impressive geographical reach. When you are reliant on consumers, geographical diversity is a necessity to grow under varied economic conditions.

The company’s recent acquisition of Warnambool is key to the company’s geographical expansion because it gives it more access to the Asia Pacific region, a key region of future growth. China, in particular, is seen as a major market with huge future potential as the countries dairy consumption grows while at the same time its domestic production declines.

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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.

Fool contributor Leia Klingel has no position in any stocks mentioned.

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