Investing

Hot Stock: Saputo

Buy into milk and cheese.

Saputo executive chairman Lino Saputo

Saputo executive chairman Lino Saputo

If there’s one sector that never goes out of style, it’s the food industry. People need to eat regardless of the economic climate, which is why a lot of these companies do well in volatile markets. One business that’s often a favourite of analysts and fund managers is Montreal-based Saputo (TSX: SAP), which makes a variety of dairy products.

Over the last year, the company’s stock price has climbed by 15%, but it’s fallen by about 10% over the last month after its Q4 results missed analyst expectations. Nevertheless, in Q4 it earned $100.5 million, which is a big improvement over the $2.6 million loss it posted during the same period in 2012. Revenues also increased by 20% year-over-year.

In a June 6 note, Scotia analyst Patricia Baker said that while the company did miss estimates, it’s doing a good job positioning itself for more growth in the future. The company recently consolidated its operations in Montreal, which, she thinks, will lead to a lower cost structure and more efficient operations. It also closed two plants, one in Manitoba and the other in Quebec, which will help it contain costs.

Saputo ended its investments in Wales and Germany too. It was testing the waters to see where opportunities existed in the European market, but found little growth there. However, it is expanding in America thanks to its January $1.45 billion purchase of Morningstar Foods. “[It gets] a much broadened reach in the U.S. market and we see Morningstar paving the way for even further tuck-in deals,” she writes. “It’s a solid compliment to the portfolio of products in Saputo’s U.S. operations.”

Baker cautions investors to be patient. The company has said it will continue to lower costs, but it will also continue to expand through acquisitions. All of that could take a while, but growth is coming, she says. She expects 2014 earnings per share to come in at $3.12, up from the $2.55 she hopes to see this year, and thinks it can hit $3.35 in 2015. She also forecasts revenue to climb by about 5% this year over last year and then jump by 22% in 2014.

The stock is currently trading at about $48, but Baker says it will rise to $52 over the next 12 months. Analysts from BMO and RBC have both set $55 price targets.

While Saputo has to cut costs and find ways to grow like everyone else, this is still an ideal stock to add to your portfolio. If another setback does occur, it likely won’t fall as hard as everyone else. For instance, between October 2008 and March 2009, it dropped 21%, while the S&P/TSX Composite fell 37%.

It also pays 1.74% yield, so at least you’ll get a tasty dividend while you wait for the stock price to climb.