Why Saputo? A Stellar, Recession-Proof Stock

Today I initiated a position in Canada-based dairy operator Saputo Inc. (SAPIF.PK) at C$22.20 per share. Saputo is one of the largest milk processors in the world; you can't get much more defensive than milk and cheese.

Why Saputo?

This company is extremely recession resistant. Even if we we are headed into a deep, deep recession I am betting consumers will not let go of their weekly purchases of cheap unhealthy snacks such as Jos Louis, as well as dairy products such as cheese, yogurt, and milk. Saputo's earnings should hold up better than most other firms against the wrath of a nasty recession. You'll find Saputo products in the coolers of Wal-Mart (WMT) as well as Costco (COST), the two best retailers in the business.

Saputo's fundamentals are excellent. Some highlights:

• 14.8% compound annual earnings growth rate since 1999
• Return on Equity has been consistently above 15%
• Long term debt has come down steadily over the years and the current debt/equity ratio is a very conservative 0.21
• Pay out ratio under 33%
• Current yield of 2.4%, with a 3 year dividend growth rate of 15.8%

Why Now?

I must admit Saputo is not a cheap stock. Even at 14.8x earnings and a price to book of 2.7, Saputo still seems a little on the pricey side if you are comparing it to many of the more cyclical firms out there. Historically though, these are reasonable levels to get into Saputo as the stock rarely trades below a P/E of about 15x. Here are some comparable P/E ratios for stocks that are in very similar businesses to Saputo:

Pepsico (PEP) = 15.3x, Kraft (KFT) = 16.7x, Campbell Soup (CPB) = 16.9x, Kellogg (K) = 13.8x, General Mills (GIS) = 16.5x.

Saputo is down 25.6% year to date, while the S&P 500 is down over 44%. In this case, I feel that the premium I am paying for Saputo is warranted due to its stellar growth, marketing position, and defensive nature.