Should You Buy, Sell, or Hold Saputo Inc.’s Stock Following its Mixed Q3 Report?

Saputo Inc. (TSX:SAP) has just announced its third-quarter earnings, and its stock has responded by falling over 3%. Should you buy on the dip?

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The Motley Fool

Saputo Inc. (TSX:SAP), one of the top 10 largest dairy processors in the world and the largest in Canada, released its third-quarter earnings for fiscal 2015 on February 5, and its stock has responded by falling over 3%. Let’s take a look at the most important statistics from the report to determine whether we should use this weakness as a long-term buying opportunity or a warning sign.

The third-quarter results are in

Here’s a summary of Saputo’s third-quarter earnings compared to what analysts had projected and its results in the same period a year ago.

Metric Reported Expected Year Ago
Earnings Per Share $0.39 $0.40 $0.37
Revenue $2.82 billion $2.66 billion $2.34 billion

Source: Financial Times

Saputo’s earnings per share increased 5.4% and its revenue increased 20.4% compared to the third quarter of fiscal 2014. The company’s solid earnings per share growth can be attributed to its net income increasing 7.3% to $154.6 million, while its strong revenue growth can be attributed to sales rising in all three of its major segments, including 22.5% growth to $1.39 billion in its USA segment, 5.2% growth to $1.01 billion in its Canada segment, and 69.1% growth to $422 million in its international segment.

Saputo also noted that it was positively impacted by the rising average market prices of cheese and butter, with the average block market per pound of cheese increasing 11.8% to $2.05 and the average butter market price per pound increasing 28.3% to $2.03 compared to the year-ago period.

Here’s a quick breakdown of six other notable statistics and updates from the report compared to the year-ago period:

  1. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 7.2% to $278.7 million.
  2. Adjusted EBITDA margin contracted 120 basis points to 9.9%.
  3. Cash generated by operating activities decreased 13.1% to $182.3 million.
  4. Free cash flow decreased 22.1% to $127.53 million.
  5. Returned approximately $76.67 million to shareholders in the form of dividends and share repurchases, an increase of 29.8% year-over-year.
  6. Ended the quarter with $47.25 million in cash and cash equivalents, a decrease of 5.7% from the second quarter.

Saputo announced that it would be maintaining its quarterly dividend of $0.13 per share, and it will be paid out on March 13 to shareholders of record at the close of business on March 2.

Should you buy shares of Saputo on the dip?

Saputo is one of the world’s largest dairy processors, and increased demand for its products as well as higher cheese and butter prices led it to a very strong third-quarter performance, but its stock reacted by falling over 3%.

I do not think that the post-earnings weakness in Saputo’s stock is warranted, so I think investors should use it as a long-term buying opportunity. I think this because its stock trades at inexpensive forward valuations, including just 21.8 times fiscal 2015’s estimated earnings per share of $1.62 and just 20.3 times fiscal 2016’s estimated earnings per share of $1.74. In addition, the company pays an annual dividend of $0.52 per share, giving its stock a respectable 1.5% yield, and it has raised its dividend for 16 consecutive years, which makes its stock both a value and dividend growth play today.

With all of this information in mind, I think Saputo represents one of the best long-term investment opportunities in the food industry today, so Foolish investors should take a closer look and consider initiating positions.

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 Joseph Solitro has no position in any stocks mentioned.

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