Leadership Changes And Supply Chain Investment Will Improve Efficiency And Shareholder Value

Key Takeaways

• Leadership changes and strategic initiatives are set to enhance operational efficiency and profitability, positively impacting revenue and net margins.
  
• Investments in technology and innovation target market share expansion and enhanced operational efficiencies, boosting long-term value for shareholders.
  
• Macroeconomic volatility and inflation pressures in key markets threaten Saputo's margins and financial stability, challenging profitability and international earnings.

Catalysts

Produces, markets, and distributes dairy products in Canada, the United States, Argentina, Australia, and the United Kingdom.

• Saputo's executive leadership changes, including internal promotions and new roles like the Global Chief Operating Officer and Chief Commercial Officer, are expected to drive growth and operational efficiency, impacting revenue and net margins positively.
  
• The company's strategic network optimization initiatives, particularly in the U.S., are anticipated to yield $100 million in savings and improve capacity utilization, which will benefit earnings and net margins as duplicate costs decrease.
  
• Continued focus on innovation and brand expansion in global markets, including new product launches in the U.S. and Europe, is aimed at increasing market share and revenue growth.
  
• Investments in technology, supply chain efficiencies, and cost-saving initiatives, especially in Canada and Australia, are expected to enhance operational efficiencies, thus positively impacting EBITDA and net margins.
  
• The planned share buyback program (normal course issuer bid) is positioned to optimize the capital structure, potentially increasing EPS and delivering long-term value to shareholders.

Saputo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saputo's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 4.4% in 3 years time.
• Analysts expect earnings to reach CA$871.2 million (and earnings per share of CA$2.16) by about December 2027, up from CA$236.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$1.0 billion in earnings, and the most bearish expecting CA$759 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.5x on those 2027 earnings, down from 47.4x today. This future PE is lower than the current PE for the CA Food industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 1.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.57%, as per the Simply Wall St company report.

Saputo Future Earnings Per Share Growth

Risks

• Saputo faces significant risks from macroeconomic volatility, such as unfavorable U.S. dairy commodity markets, which could negatively impact adjusted EBITDA and net margins.
  
• Hyperinflation and currency issues in Argentina have led to higher production costs, higher milk costs, and have affected export margins, which could continue to put pressure on international earnings.
  
• The negative milk-cheese spread in the U.S. decreases margins, presenting a challenge to profitability that may not be resolved in the near term, affecting both EBITDA and net earnings.
  
• Ongoing inflationary pressures and consumer demand volatility, especially in the U.K., could lead to fluctuating revenue and margin performance, impacting overall financial stability.
  
• The company continues to incur duplicate operating costs during network optimization efforts, potentially straining profit margins until these initiatives are fully implemented and optimized.

Valuation

• The analysts have a consensus price target of CA$32.15 for Saputo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$38.0, and the most bearish reporting a price target of just CA$25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$19.8 billion, earnings will come to CA$871.2 million, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 5.6%.
• Given the current share price of CA$26.41, the analyst's price target of CA$32.15 is 17.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.