One of the more overlooked Canadian stocks out there, I’d argue Saputo (TSX:SAP) is one of the quietest outperformers over the course of the past year.
Indeed, looking at the stock chart above, many investors may be surprised to see returns of more than 50% year to date for the cheese maker. A top 10 dairy processor globally, Saputo is a global force to be reckoned with in a sector, I think, that is largely misunderstood.
Let’s dive into Saputo’s business model and why this overlooked (and undervalued) Canadian stock is worth considering right now.
Source: Getty Images
What makes Saputo special?
The global dairy industry is one that many investors may rightly be minimally focused on. Traditionally, margins are razor-thin, and this is a volume-driven business that can easily be disrupted by myriad headwinds.
Volatility has driven lumpy results for Saputo in the past, though the stock’s recent performance has been strong. I’d argue that’s likely at least partly a function of the company’s diversified business model, which includes a wide array of milk, cheese, and other dairy products, as well as a portfolio of other brands that have been strategically acquired over the years.
This has led to strong fundamentals and growth prospects, which are among the best in this sector. Accordingly, looking at Saputo’s forward price-earnings multiple of less than 20 times, many in the market continue to view this company as a long-term winner.
Recent results speak for themselves
Saputo’s recent first-quarter results may certainly not look like anything to write home about, particularly when one compares this company to other high-growth sectors. Indeed, 1% revenue growth may not seem enticing, and it’s not. But the company’s adjusted earnings before interest, taxes, depreciation, and amortization growth of 11% and its earnings per share growth of 13% are compelling, and that’s the key story behind Saputo right now in my view.
Investors are looking at this company as an operational efficiency story, with the company streamlining its operations and focusing on profitability over revenue growth. As a mature player in a mature industry, I’d argue that’s the right move.
And as Saputo continues to return capital to shareholders in the form of robust share buybacks and a dividend yield of 2.1%, any sort of capital appreciation (such as the surge we’ve seen this year) means investors are seeing incredible overall returns.
The bottom line is, I see this performance continuing for some time to come. Again, this is a business that requires scale and efficiency. Saputo provides both and rewards shareholders. What’s not to like?
