On today’s TSX Breakouts report, there are 15 stocks on the positive breakouts list (stocks with positive price momentum), and 12 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is stock that may surface on the positive breakouts list later this year – Saputo Inc. (SAP-T +1.03%increase). For the stock to breakout of its current trading range, investors will be waiting to see continued earnings improvement and margin expansion. Consequently, the stock is best suited for consideration by patient investors.
A brief outline on Saputo is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec-based Saputo produces and distributes dairy products under several brands, including Saputo, Dairyland, Neilson, Armstrong. With 67 plants worldwide, the company’s products are sold in over 60 countries.
The company has four main reporting segments. In fiscal 2022, 43 per cent of company’s revenue and 25 per cent of adjusted EBITDA stemmed from the U.S., 28 per cent and 41 per cent from Canada, 23 per cent and 22 per cent was from its international sector (Argentina and Australia), and 6 per cent and 12 per cent from its Europe sector (the U.K).
In fiscal 2022, 46 per cent of revenue stemmed from cheese, 28 per cent from dairy products, 12 per cent from milk, 8 per cent from by-products and ingredients and 6 per cent from non-dairy products.
The company serves three main markets. In 2022, retail represented 50 per cent of revenue, foodservice accounted for 30 per cent of revenue and industrial represented 20 per cent of revenue.
SAPUTO INC
35.47+1.95 (5.82%)
YEAR TO DATE
JAN. 17, 2023
DEC. 29, 2022
33.52
APRIL 21, 2023
35.47
SOURCE: BARCHART
Investment thesis
- Seasoned management. Focused on prudent, disciplined growth and execution on its Global Strategic Plan. On the last earnings call, management indicated that in the near-term it remains focused on cost savings given high inflationary pressures across its supply chain as well as on wages.
- Market leadership. The company is one of the top 10 dairy processors worldwide. In the U.S., the company is one of the top three cheese producers.
- Healthy balance sheet to fund its growth. Net debt-to-adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) stood at 2.74 as of Dec. 31. Management targets a long-term leverage ratio of 2.25 times.
- Earnings and margin recovery. Adjusted EBITDA fell to $1.155-billion in fiscal 2022 (fiscal year-end is March 31), down from $1.471-billion reported in fiscal 2021.The consensus EBITDA estimates are $1.55-billion in fiscal 2023, $1.79-billion in fiscal 2024, and $2-billion in fiscal 2025. Focus on continued adjusted EBITDA margin improvement, which stood at 9.7 per cent in the third-quarter of fiscal 2023, up from 6.6 per cent reported in the fourth-quarter of fiscal 2022.
- Attractive valuation.
- Potential risks to be aware of include: 1) fluctuating commodity prices; 2) inflationary pressures (higher costs); 3) labour shortages, particularly in the United States; and 4) persistent supply chain challenges.
Quarterly earnings results
After the market closed on Feb. 9, the company reported better-than-expected third-quarter fiscal 2023 financial results.
Adjusted EBITDA was $445-million, surpassing the consensus estimate of $409-million and up 38 per cent year-over-year. Adjusted earnings per share came in at 53 cents, above the Street’s forecast of 47 cents, and up from 33 cents reported during the same period last year. The share price rallied 5 per cent the following day.
On the earnings call, chairman, president and chief executive officer Lino Saputo remarked on management’s Global Strategic Plan, “Several capital investments and consolidation initiatives in our U.S. sector were announced last week to further optimize our manufacturing footprint and enhance operational agility. This includes the construction of a new state-of-the-art cut-and-wrap facility in Franklin, Wisconsin [cost of Cdn. $240-million and expected to operate at full capacity by the third-quarter of fiscal 2025], and the expansion of string cheese operations on the West Coast. This has led to the decision to permanently close our Big Stone, South Dakota, Green Bay, Wisconsin, and South Gate, California, facilities. As a result, we will increase operating efficiencies translating into lower cost, further consolidate our production capacity in world-class facilities, and increase capacity and capabilities for higher margin value-added products to meet growing demand. Specifically, we expect to yield financial benefits beginning in Q4 [fourth-quarter] fiscal 2024, and reaching its full potential of approximately Cdn $74-million [$55-million after-tax] annually by the end of fiscal ‘27.”
On April 2, Saputo announced the sale of two of its fresh milk processing facilities in Australia for roughly $95-million.
On June 8, the company will be releasing its fourth-quarter fiscal 2023 financial results. The consensus EBITDA and earnings per share estimate are currently $390-million and 41 cents, respectively.
Dividend policy
The company pays its shareholders a quarterly dividend of 18 cents per share or 72 cents per share yearly, equating to a current dividend yield of 2 per cent.
The dividend has been maintained at this level since the third quarter of 2021.
Analysts’ recommendations
There are 10 analysts who actively cover this consumer staples stock, of which six analysts have buy recommendations, three analysts have neutral recommendations, and one analyst (Erin Lash, the analyst at Morningstar) has a “sell” recommendation.
The 10 firms providing research on the company are: ARC Independent Research, BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, Edward Jones, Morningstar, National Bank Financial, RBC Dominion Securities, Scotiabankand TD Securities.
Revised recommendations
After the company released its third-quarter earnings results in February, eight analysts revised their targets.
- ARC Independent Research’s Jim Marrone to $38 from $37.
- CIBC’s Mark Petrie to $43 from $39.
- Desjardins Securities’ Chris Li to $43 from $39.
- Morningstar’s Erin Lash to $26.50 (the low on the Street) from $26.
- National Bank Financial’s Vishal Shreedhar to $43 from $42.
- RBC’s Irene Nattel to $45 from $40.
- Scotiabank’s George Doumet to $39 from $38.
- TD’s Mike Van Aelst to $46 (the high on the Street) from $44.
Financial forecasts
Earnings are expected to recover from the steep decline in fiscal 2022. In fiscal 2020 and 2021, adjusted EBITDA was $1.468-billion and $1.471-billion, respectively. In fiscal 2022, adjusted EBITDA fell to $1.155-billion.
The consensus EBITDA estimates are $1.55-billion in fiscal 2023, $1.79-billion in fiscal 2024, and $2-billion in fiscal 2025. Management targets EBITDA of $2.125-billion in fiscal 2025. The consensus earnings per share estimates are $1.74 in fiscal 2023, $2.03 in fiscal 2024, and $2.47 in fiscal 2025.
Earnings estimates have been rising. Three months ago, the Street was expecting EBITDA of $1.495-billion in fiscal 2023 and $1.75-billion in fiscal 2024. The consensus earnings per share estimates were $1.60 for fiscal 2023 and $1.97 for 2024.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 17.5 times the fiscal 2024 consensus estimate, well below its five-year historical average of 21.4 times. Its lowest forward P/E multiple over the past five years was 15 times reached back in May 2022. The stock is trading at an enterprise value-to-EBITDA multiple of 10.5 times the fiscal 2023 consensus estimate, well below its five-year historical average of 12.5 times and near its trough level of roughly 10 times during this time period.
The average one-year target price is $40.72, suggesting the stock has 14 per cent upside potential over the next year. Individual target prices provided by nine firms are: $26.50 (from Morningstar’s Erin Lash), $38, $39, four at $43, $45, and $46 (from TD’s Mike Van Aelst).
Insider transaction activity
Between Feb. 24 to March 3, chief human resources officer Gaétane Wagner exercised her options, receiving a total of 67,318 shares at a cost per share of $25.55, and sold 67,318 shares at an average price per share of approximately $36.51 with 42,047 shares remaining in this particular account. Net proceeds exceeded $738,000, excluding any associated transaction charges.
Chart watch
Year-to-date, the share price is up 6 per cent, relatively in-line with the S&P/TSX composite index, which is up 7 per cent as well as the S&P/TSX consumer staples (sector) index, which is up 7 per cent.
Since mid-2022, the share price has been trading sideways, largely between $32 and $36. The share price is currently trading at the upper end of this trading band.
In terms of key technical resistance and support levels, there is an initial ceiling of resistance between $38 and $40. After that, the share price has major resistance between $45 and $46. Looking at the downside, there is initial technical support around $34, near its 200-day moving average (at $33.85). Failing that there is strong technical support around $30.
ESG Risk Rating
According to Sustainalytics, Saputo has an environmental, social and governance (ESG) risk rating of 29.7 as of April 13, 2023. A rating of between 20 and 30 reflects ‘medium’ risk.
| POSITIVE BREAKOUTS | JAN. 19 CLOSE | |
|---|---|---|
| AW-UN-T | A&W Revenue Royalties Income Fund | $38.00 |
| BLU-T | BELLUS Health Inc. | $19.44 |
| CNR-T | Canadian National Railway Co | $164.79 |
| CTC-A-T | Canadian Tire Corp Ltd | $183.82 |
| CNL-X | Continental Gold Inc | $5.52 |
| CPLF-T | Copperleaf Technologies Inc. | $6.52 |
| GWO-T | Great-West Lifeco Inc | $37.58 |
| HCG-T | Home Capital Group Inc | $43.28 |
| MAXR-T | Maxar Technologies Ltd. | $70.87 |
| NOA-T | North American Construction Group Ltd. | $24.82 |
| ORE-T | Orezone Gold Corp. | $1.58 |
| PRB-T | Probe Gold Inc. | $1.77 |
| TWC-T | TWC Enterprises Ltd. | $18.49 |
| VMD-T | Viemed Healthcare Inc. | $14.94 |
| WELL-T | Well Health Technologies Corp. | $5.40 |
| NEGATIVE BREAKOUTS | ||
| BLDP-T | Ballard Power Systems Inc | $6.43 |
| CET-T | Cathedral Energy Services Ltd | $0.94 |
| DND-T | Dye & Durham Ltd. | $15.70 |
| ESI-T | Ensign Energy Services Inc | $2.81 |
| HR-UN-T | H&R Real Estate Investment Trust | $12.02 |
| LSPD-T | Lightspeed Commerce Inc. | $18.66 |
| LIRC-T | Lithium Royalty Corp. | $15.50 |
| LUC-T | Lucara Diamond Corp | $0.48 |
| MAL-T | Magellan Aerospace Corp | $6.95 |
| SOT-UN-T | Slate Office REIT | $2.13 |
| TOY-T | Spin Master Corp. | $34.18 |
| TWM-T | Tidewater Midstream and Infrastructure Ltd. | $0.86 |
Source: Bloomberg
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
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