Shares of Saputo (TSX: SAP) have underperformed the broader markets in the past decade. While Saputo stock has surged 44.4% after adjusting for dividends since September 2013, the TSX index has more than doubled investor returns in this period.
The TSX stock currently trades 40% below all-time highs, valuing the company at $12.16 billion by market cap. Let’s see if you should buy Saputo stock at its current multiple.
Is Saputo a good stock to buy?
Saputo is among the largest dairy processors in the world and enjoys leading market positions in Canada, the U.S., Australia, the U.K., and Argentina. Each year, the company processes 11 billion litres of milk into a variety of cheeses. It also sells a wide range of dairy products in over 60 countries.
Saputo sells its own brand of products as well as products labelled under its retail and food service customer brand names. Its products are provided to industrial clients in the form of ingredients, which are then used to prepare other food items and nutritional products.
With 67 manufacturing facilities, Saputo has increased sales from $14.9 billion in fiscal 2020 to $17.84 billion in fiscal 2023 (ended in March).
In the first quarter (Q1) of fiscal 2024, Saputo reported revenue of $4.27 billion, a decline of 2.8% year over year. It explained sales volumes were lower due to soft demand for dairy products in global markets and competitive market conditions in regions such as the U.S.
Despite lower sales, its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) totaled $362 million, an increase of 4.3% compared to the year-ago period.
Saputo emphasized, “We benefited from the carryover impact of higher average selling prices, driven by previously announced pricing initiatives, which were implemented to mitigate higher input costs in line with ongoing inflation and volatile commodity markets.”
However, the company had to write down inventory due to a decrease in market selling prices. Additionally, lower sales volumes negatively impacted operational efficiencies and absorption of fixed costs.
What is the target price for Saputo stock?
Saputo stated it expects inflation to moderate with respect to input costs, as it continues to manage a higher pricing environment through pricing protocols and cost-containment measures. Moreover, a stabilized workforce, fewer supply chain constraints, and operational improvement projects should enhance the company’s ability to service customers.
Saputo expects global demand for dairy products should moderate due to a sluggish macro environment and the impact of pricing elasticity.
Analysts tracking Saputo stock expect sales in fiscal 2024 to fall by 1.3% year over year to $17.6 billion and adjusted earnings to be flat at $1.8 per share. So, Saputo stock is priced at 16 times forward earnings and 0.70 times forward sales, which is reasonable, given earnings are forecast to expand by 29% annually between fiscal 2025 and fiscal 2029.
This earnings growth should also support dividend raises for Saputo. It currently pays shareholders an annual dividend of $0.74 per share, indicating a yield of 2.5%. In the last 20 years, these payouts have risen by 9.4% annually.
Due to its compelling valuation, analysts remain bullish on Saputo and expect shares to surge by 24% in the next 12 months.
