Could Saputo Inc.’s Q3 Earnings Beat Drive its Shares Higher?

Saputo Inc. (TSX:SAP) beat third-quarter earnings estimates on February 4, and its stock reacted by rising over 3%. Could it continue higher from here?

| More on:
The Motley Fool

Saputo Inc. (TSX:SAP), the largest dairy processor in Canada and one of the 10 largest in the world, announced better-than-expected third-quarter earnings results during trading hours on February 4, and its stock ended the day with a gain of more than 3%. Let’s take a closer look at the results and the fundamentals of its stock to determine if this could be the start of a sustained rally higher and if we should be buyers today.

The results that easily beat expectations

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

Metric Q3 2016 Actual Q3 2016 Expected Q3 2015 Actual
Adjusted Diluted Earnings Per Share $0.44 $0.39 $0.38
Revenues $2.90 billion $2.87 billion $2.82 billion

Source: Financial Times

Saputo’s adjusted diluted earnings per share increased 15.8% and its revenues increased 2.8% compared with the third quarter of fiscal 2015. The company’s very strong earnings-per-share growth can be attributed to its adjusted net income increasing 13.5% to $175.4 million, helped by its total operating costs increasing just 1.5% to $2.58 billion.

Its slight increase in revenue can be attributed to higher sales volumes, the inclusion of revenues from its acquisitions of Woolwich in October 2015 and the everyday cheese business of Lion-Dairy & Drinks Pty Ltd. in May 2015, and a $261 million gain on foreign currency translation. However, this growth was partially offset by lower international selling prices of its cheese and dairy ingredients and the disposal of its Bakery division in the fourth quarter of fiscal 2015.

Here’s a quick breakdown of 10 other notable statistics from the report compared with the year-ago period:

  1. Revenues increased 12.9% to $1.57 billion in its U.S.A segment
  2. Revenues decreased 1.3% to $992.8 million in its Canada segment
  3. Revenues decreased 21% to $333.4 million in its International segment
  4. Average block market per pound of cheese decreased 21% to US$1.621
  5. Average butter market price per pound increased 26.5% to US$2.562
  6. Average whey market price per pound decreased 61% to US$0.226
  7. U.S. average exchange rate to the Canadian dollar increased 17.5% to $1.333
  8. Adjusted earnings before interest, taxes, depreciation, and amortization increased 15% to $320.4 million
  9. Earnings before income taxes increased 15.6% to $250.54
  10. Cash generated from operating activities increased 15.4% to $296.31 million

Saputo also announced that it will be maintaining its quarterly dividend of $0.135 per share, and the next payment will come on March 11 to shareholders of record at the close of business on March 1.

Could Saputo’s stock continue higher from here?

It was a great quarter overall for Saputo, and the fact that it surpassed analysts’ expectations was icing on the cake, so I think its stock has responded correctly by rising. I also think this could be the start of a sustained rally higher and that the stock represents a great long-term buy today for two reasons in particular.

First, Saputo’s stock still trades at just 23.3 times fiscal 2016’s estimated earnings per share of $1.51 and only 20.5 times fiscal 2017’s estimated earnings per share of $1.72, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 37 and the industry average multiple of 33.7.

With the multiples above and its estimated 10% long-term earnings growth rate in mind, I think the company’s stock could consistently command a fair multiple of at least 25, which would place its shares around $43 by the conclusion of fiscal 2017, representing upside of over 22% from today’s levels.

Second, Saputo pays an annual dividend of $0.54 per share, which gives its stock a yield of about 1.5%. A 1.5% yield may not seem like a legitimate reason for buying the stock at first glance, but it is of the utmost importance to note that the company has raised its annual dividend payment in each of its last 15 fiscal years, and its 3.8% increase in August 2015 has it on pace for 2016 to mark the 16th consecutive year with an increase.

With all of the information provided above in mind, I think all Foolish investors should take a closer look at Saputo and strongly consider initiating positions in it today.

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.

More on Investing

warning or alert

Bitcoin Crash 2022: Is the Winter Coming?

People shouldn’t be surprised anymore whenever Bitcoin (CRYPTO:BTC) sharply drops like it did on January 21, 2022. It fell 10.38% …

Read more »

Supermarket aisle with empty green shopping cart

Find Growth Stocks in Different Segments of the Market

Is your portfolio diversified? Investors frequently ponder the answer to that question. Fortunately, the market gives us plenty of options …

Read more »

cryptocurrency, crypto, blockchain

Should You Sell Shiba Inu for Other High Potential Cryptocurrencies?

There were several cryptocurrencies that gained popularity and earned investors major rewards in 2021. One of the biggest gainers, though, …

Read more »

oil and gas pipeline
Energy Stocks

4 TSX Stocks Returned More Than 10x Since the Pandemic Crash: Should You Buy?

What’s your return expectation when investing in stocks? A yearly return of 10%-15% seems reasonable, right? That’s the case for …

Read more »

Oil pumps against sunset
Energy Stocks

This Oil Stock Is up 10% in 2022 and it’s Still Undervalued

CES Energy Solutions (TSX:CEU) is a Calgary-based company that provides consumable chemical solutions throughout the life-cycle of an oilfield. It …

Read more »

Glass piggy bank
Dividend Stocks

How to Accelerate Your TFSA Returns From Dividend Stocks

The stock market saw a correction in January, as investors booked profits ahead of the central bank’s interest rate hikes. The TSX …

Read more »

money cash dividends
Dividend Stocks

Top 3 Dividend Stocks in Canada for 2022

Canada is home to some of the best dividend stocks in the world. With finance, telecoms, and energy dominating the …

Read more »

Shopping and e-commerce
Tech Stocks

Can Shopify Recover to New All-time Highs in 2022?

With more than 1.7 million merchants on its platform, Shopify (TSX:SHOP)(NYSE:SHOP) is undoubtedly a core platform for SMBs. The company’s software-as-a-service platform …

Read more »