Saputo case instruction -RSM336 PDF

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RSM336 – Investments Dana Boyko and Maureen Stapleton Rotman School of Management

Saputo Inc. Should we buy this stock? In August 2019, Jenny Lee, a recent Rotman Commerce graduate and newly hired analyst at Blue Water Investment Management, met with her manager Mary Wilson, CFA to discuss the firm’s Core Canadian Equity Fund. Mary, a senior portfolio manager at Blue Water, wanted to increase the diversification of the fund by a purchasing another stock and asked Jenny to make a recommendation. Mary was becoming increasingly concerned about the impact of slowing economic growth on the performance of the Core Canadian Equity Fund so she asked Jenny to recommend a high quality, defensive stock that could be purchased at a good price. Later that day, Jenny learned from the institutional sales/trading desk at investment dealer Desjardins Securities, t Saputo intended to use the estimated $600 million proceeds from the sale of this new share offering to repay some of the debt incurred to finance its recent acquisition in Australia. Jenny knew that Saputo was very large successful Canadian company that operated in the food products industry. She also knew, from her finance courses at Rotman, that the market price of a stock , so she decided to research Saputo and make a recommendation to her manager.

Saputo Inc. Saputo, a Canadian company, is one of the top ten dairy processors in the world. It is a leading cheese manufacturer and fluid milk and cream processor in Canada, the top dairy processor in Australia, and the second largest in Argentina. In the USA, Saputo ranks among the top three cheese producers and is one of the largest producers of extended shelf-life and cultured dairy products. In the United Kingdom, Saputo is the largest manufacturer of branded cheese and a top manufacturer of dairy spreads. Saputo Inc. is a publicly traded company and its shares are listed on the Toronto Stock Exchange under the symbol “SAP”. The company was founded in Montreal in 1954 by Lino Saputo and his father, a master cheesemaker, who had just emigrated from Italy to Canada in search of a better life. With only $500 in savings, they started a small cheese business, which supplied mozzarella to local pizza restaurants. During the next 30 years, Saputo went through a significant growth period, becoming Canada’s most important producer of mozzarella cheese. By the end of the 1990s, the company had tripled in size and became a leading cheese producer in the Unites States through its acquisition of Stella Foods.

Subsequent acquisitions in Europe, South America, and Australia solidified Saputo’s position as a global leader in dairy products for consumption by individuals, restaurants, and wholesale food manufacturers.

In 2017 Lino A. Saputo, Jr. assumed the position of Chairman and CEO, taking over from his father. He was named Canada’s Outstanding CEO of the Year in 2019. When speaking about Saputo’s motivation for global acquisitions, Mr. Saputo explained that the Canadian dairy market is mature and has little growth potential. In addition, strict regulation of milk prices in Canada’s dairy industry limits the profitability of local dairy processors.

Jenny’s Research Jenny began her research by thinking about Mary’s requirements. Mary had asked her to recommend a high-quality, defensive stock that could be purchased at a good price. She wondered if Saputo would meet those criteria. 1. Is Saputo a defensive stock? Jenny wondered if Saputo, a global dairy processor, is a defensive stock. She used S&P Capital IQ to research Saputo’s industry classification, shown in Exhibit 1. Jenny also wondered about the impact of Saputo’s global diversification. Additional information on Saputo’s strategic position is presented in Exhibits 2, 4, and 7.

2. Is Saputo’s stock price attractive? From a recent reseach report published by Scotia Capital, Jenny discovered that Saputo is a large capitalization stock whose market price had fallen more than 10% during the past three months. Does this recent price decline present an attractive buying opportunity?

To obtain further insight on the stock price, Jenny decided to compare Saputo’s P/E ratio with P/E’s of comparable firms and the industry average, using the data presented in Exhibit 3.

3. Is Saputo a High Quality Stock? Jenny remembered from the finance and accounting courses she studied at Rotman that Quality has several components. They include . She downloaded information from S&P Capital IQ, shown in Exhibit 5, and wondered which ratios were relevant. She wondered if a using this data would give her a better understanding of the company. She also wondered about the relevance of data shown in Exhibit 6.

4. Should Jenny recommend the purchase of Saputo shares? Why or why not? Is there any additional information that Jenny should consider before making her recommendation?

Exhibit 1:

Exhibit 2:

Exhibit 3:

Exhibit 4:

Exhibit 5: Saputo: Information retrieved from S&P Capital IQ:

2017

2018

2019

ROE

17.5%

18.7%

14.8%

Gross Margin Asset Turnover Liabilities/Total Assets Total Assets/Equity

11.6% 1.5x 43% 1.75

11% 1.5x 40% 1.67

9% 1.5x 45.2% 1.82

2.0x

1.9x

1.6x

Dividend Payout Ratio Dividends/share

31.4% $0.60

28.6% $0.64

33.7% $0.66

5 year Growth Rates: Revenue Net Income

10% 13.8%

9.6% 12.1%

7.9% 7.2%

P/E ratio (ttm) P/B

24.2x 4.0x

19.7x 3.4x

21.6x 3x

Current Ratio

Exhibit 6:

Exhibit 7:...