Saputo Inc (OTCPK:SAPIF) is the largest dairy processor in Canada and tenth largest in the world. It had a tough year as low dairy prices caused Saputo's growth to lag analyst expectations. Is the recent weakness a buying opportunity in this consumer staple or has the milk gone sour?
Slow growth in 2015
In Q2 2016, Saputo reported weaker than expected earnings with $0.38 EPS and a $2.79 billion revenue compared to a $0.39 EPS and a $2.7 billion revenue in Q2 2015. A decrease of 2.6% for EPS during the year. Operating costs increased 3.8% to $2.51 billion and its net income decreased 3.9% to $149.7 million. The price of cheese, butter and whey decreased by 20%, 16% and 53% respectively. These low prices have cut into Saputo's margins and could continue to be a weakness going forward.
Is the Trans-Pacific Partnership going to hurt Saputo?
If the TPP goes through Canada's dairy supply management system could be removed and dairy prices could decrease even further which would cut into Saputo's bottom line and cause the stock to drop even further. Although Saputo has a great distribution network this TPP does not seem like it will help Saputo in the short term.
Growth into China may be fading
Saputo has a large position in Warrnambool Cheese and Butter which is an Australian dairy producer. This acquisition gave Saputo the growth potential to more easily export its products to China. Given the recent weakness in China I believe that the Chinese growth is limited especially since the Chinese do not consume as much dairy products as the North Americans or Europeans. Saputo is quickly realizing that the growth that was once there is tapering off.
Dividend growth player but overvalued?
Saputo currently has a 1.6% dividend yield which is nothing impressive but its important to note that over the past five years Saputo has increased their dividend at an average rate of 11-13% annually. Dividend investors can definitely do better elsewhere since the stock currently trades at 21.88 P/E which is expensive given the commodity nature of the dairy products it produces. Although the stock has dropped in the latter part of 2015, it has since recovered partially. I believe that Saputo is not a buy at current levels and is a hold. There are way too many headwinds facing the dairy market right now and the stock should be trading lower at a more reasonable valuation of around 15 P/E which could see the stock price drop by another 25%.
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