Capital Projects Will Generate Significant Operational Improvements In US

Key Takeaways

• Strategic capital projects and network optimization in the U.S. are driving operational efficiencies, enhancing margins, and supporting revenue growth.
  
• Strong cash flows enable share repurchases, suggesting undervaluation, while brand investment aligns with consumer trends, boosting revenue and market share.
  
• Uncertain market conditions and cost pressures across key regions threaten Saputo's financial performance and stability, potentially impacting future earnings and profitability.

Catalysts

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

• The execution of Saputo's large capital projects is generating significant operational improvements, including $30 million of cost savings and benefits in the U.S. sector, which is expected to enhance net margins and earnings.
  
• Decisions to focus on share repurchases highlight strong cash flows and a belief that the stock is undervalued; expanding the NCIB could significantly boost earnings per share (EPS).
  
• Network optimization initiatives in the U.S. aim to increase capacity utilization and enhance operational efficiencies, which are anticipated to drive revenue growth and better net margins.
  
• Adjustments to the USDA milk pricing formula, effective June 2025, are expected to positively impact Saputo's adjusted EBITDA by $60 million to $70 million annually, improving earnings.
  
• Continuous investment in brand marketing and alignment with consumer trends in Canada and the U.S., such as high-protein milk products, supports better revenue growth and market share expansion.

Saputo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Saputo's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.8% today to 4.2% in 3 years time.
• Analysts expect earnings to reach CA$837.4 million (and earnings per share of CA$2.11) by about April 2028, up from CA$-158.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as CA$939 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from -66.9x today. This future PE is greater than the current PE for the CA Food industry at 12.7x.
• Analysts expect the number of shares outstanding to decline by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.82%, as per the Simply Wall St company report.

Saputo Future Earnings Per Share Growth

Risks

• The decision to withdraw the long-term adjusted EBITDA aspiration due to unsettled market conditions indicates uncertainty in achieving expected financial performance, which could negatively impact future earnings.
  
• Ongoing challenging market conditions in the U.K., including persistent inflation and elevated interest rates, have led to a goodwill and intangible asset impairment, affecting net margins and suggesting risk to the stability of the company’s European operations.
  
• The U.S. sector faces challenges from a negative milk-cheese spread, which has impacted adjusted EBITDA despite efforts to mitigate through pricing protocols, posing a risk to future net margins.
  
• In Argentina, economic instability characterized by inflation and currency devaluation has increased production costs and strained operations, creating risk to revenues and earnings in the international sector.
  
• High milk costs and other rising input costs in Europe could negatively impact future adjusted EBITDA margins if not adequately managed, presenting risks to the profitability and net margins of the company.

Valuation

• The analysts have a consensus price target of CA$29.636 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$35.0, and the most bearish reporting a price target of just CA$26.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$20.1 billion, earnings will come to CA$837.4 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 5.8%.
• Given the current share price of CA$25.23, the analyst price target of CA$29.64 is 14.9% 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.