Monday, December 1, 2008

Saputo purchase

Today I initiated a position in Canada-based dairy operator Saputo Inc. (SAP) at $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 their stellar growth, marketing position, and defensive nature.

More blogging on Saputo: Milk Runs In My Veins, & Dividend Analysis, Saputo

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Nurseb911 said...

Good buy MG! This stock has been a very dependable dividend payer & has increased that dividend solidly throughout its history. Good company to diversify away from financial & others stocks.

Thicken My Wallet said...

I am a little worried about Saputo. It bulked up through acquisitions. I wonder if they can make them work properly in a down-market or they have to write off goodwill from acquisitions.

Its more of a short-term issue (1-2 years). A good diversification play though. Best of luck.

Potato said...

I've been watching Saputo, but there are a lot of rumours that it will replace BCE in the index. If the BCE deal falls through (and it really looks like it will), Saputo might take a hit on Dec 11. I'll be watching even more closely then :)

MG (moneygardener) said...

I wasn't aware of that Potato. Sometimes things like that have no effect on stocks though. If SAP does take a hit I'll be looking to add as well.

TMW, Hopefully they can integrate the acquisitions well. I like their product areas during times like these and in fact, anytime.

Nurseb911 said...

I just noticed the link too - thanks!

I don't know if the inclusion into the TSX60 is that big of a deal. SAP is one of a number of stocks (CU or MRU.A) that could have been chosen to diversify the index away from its heavy sector weightings. There will be other opportunities for it to enter that index as it grows over the years, but other than higher volumes I don't really see any +/- to it.

I think the Neilson acquisition was a very conservative purchase. Their acquisitions won't grow earnings in any spectacular way, but it does diversify their product base and core competency into one key area which I like as a long-term move.