Is Saputo Inc.’s (TSE:SAP) Cash Outlook Optimistic?

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Two important questions to ask before you buy Saputo Inc. (TSE:SAP) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, Saputo is currently valued at CA$16b. Today we will examine Saputo’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.

See our latest analysis for Saputo

What is Saputo’s cash yield?

Saputo’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Saputo to continue to grow, or at least, maintain its current operations.

I will be analysing Saputo’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

Along with a positive operating cash flow, Saputo also generates a positive free cash flow. However, the yield of 1.19% is not sufficient to compensate for the level of risk investors are taking on. This is because Saputo’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

TSX:SAP Balance Sheet Net Worth, February 22nd 2019
TSX:SAP Balance Sheet Net Worth, February 22nd 2019

Is Saputo’s yield sustainable?

Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Saputo’s expected operating cash flows. Over the next two years, Saputo’s operating cash flows is expected to grow by a double-digit 20%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Saputo’s operating cash flow in the past year, as well as the anticipated level going forward.
Current +1 year +2 year
Operating Cash Flow (OCF) CA$962m CA$1.0b CA$1.2b
OCF Growth Year-On-Year 7.6% 11%
OCF Growth From Current Year 20%

Next Steps:

The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Saputo as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Saputo to get a better picture of the company by looking at:

  1. Valuation: What is SAP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SAP is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Saputo’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.