Saputo (TSX: SAP) is one of the world’s biggest dairy product producers and is a top Canadian stock in its own right. The company has seen relatively frequent ups and downs in dairy prices and various supply chain disruptions affecting its stock price. One look at the chart below highlights these trends.
However, with Saputo stock now trading near the lower end of what appears to be a rather consistent longer-term band, the question many investors have is whether this stock can bounce back from here toward the $35-per-share level.
Let’s dive into where this stock could be headed over the near to medium term.
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Near-term outlook
Saputo’s business model is relatively straightforward, with the dairy producer’s portfolio comprised of cheese, fluid milk, flavoured milk, dairy ingredients, extended shelf-life milk, cultured products, functional dairy blends, dairy ingredients, and cream products. The company operates facilities in Australia, Canada, and the U.S.
Saputo’s recent first-quarter (Q1) results showed revenue growth of 9.5% and net earnings, which remained stable at $0.33 per share. Thus, margins continue to be under pressure, and the company’s stock price has clearly reflected the market’s concern on this front.
That said, earnings before interest, taxes, depreciation, and amortization growth has been positive, up around 5.8% on a year-over-year basis, and leading some investors to consider this stock as a potential defensive play, given how insulted the Canadian dairy sector is.
If the economy continues to churn along (pun intended) in the coming years, this is certainly a stock I think can head toward the higher end of its historical trading band, though risks do exist.
Medium-term outlook
Over the next five years, I’m less optimistic about Saputo’s prospects. The dairy sector is noted for its high levels of competition. And while Saputo may be relatively insulated in the Canadian market, the company’s international sales could be impacted by any sort of global economic downturn.
We haven’t seen a recession in some time, and while that may not be the consensus projection of most analysts out there, this is a stock I’d be wary of moving forward. Additionally, increased tariffs from the U.S. and isolationist policies could impact Saputo’s business in this key market.
I’m of the view Saputo is a stock that investors can hold for the very long term (more than five years), but anything can happen over the coming years. However, near its lower historical stock price range, this stock does look relatively attractive at current levels. And with a dividend yield of 2.9%, there is an argument to be patient and wait for a rebound while holding onto this dividend stock.
