On today’s Breakouts report, there are 47 stocks on the positive breakouts list (stocks with positive price momentum), and 11 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is stock that surfaced on the positive breakouts list. The share price finally recovered to its pre-COVID price.
On Thursday, the company will be releasing its year-end financial results. However, the main focus will likely be on the company’s global strategic plan, which will be discussed in detail that day.
This stock is best suited for consideration for investors seeking a defensive stock with a dependable dividend. The stock highlighted today is Saputo Inc. (SAP-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Quebec-based Saputo produces and distributes dairy products such as cheese, milk, cream, yogurt, sour cream, and cottage cheese under brands including Saputo, Dairyland, Neilson, Nutrilait, Trutaste, Baxter, Scotsburn, Armstrong, in addition to many more brand names. With 63 plants worldwide, the company’s products are sold in over 50 countries across the globe.
The company has four main reporting segments, broken down by geographical regions. In fiscal 2020, 47.5 per cent of company’s revenue stemmed from the U.S., 26.8 per cent of revenue was from Canada, 20.6 per cent was from its international sector - Argentina and Australia, and 5.1 per cent of total revenue was from its Europe sector – the U.K.
Investment thesis
- Market leadership. The company is one of the top 10 dairy processors worldwide. In the U.S., the company is one of the top three cheese producers.
- Management team focused on prudent, steady growth. On May 25, management announced two acquisitions for a total cost of roughly $187-million.
- Healthy balance sheet to fund its growth. Net debt-to-adjusted EBITDA stood at 2.54 as of Dec. 31, 2020.
- Reasonable valuation. The stock is trading relatively in-line with its three-year average forward price-to-earnings (P/E) multiple.
- Potential near-term drivers: 1) gradual resumption of dining out with vaccine rollout programs advancing and lockdowns being lifted, 2) execution on its global strategic plan. This new plan will be detailed on June 3, along with the company’s fiscal year-end results.
- Potential risks to be aware of include: 1) resurgence of COVID-19 lockdowns and closures of in-dining service from restaurants and quick-service operators, 2) fluctuating commodity prices, 3) competitive pressures, and 4) investor sentiment that may favour high growth stocks over defensive stocks as the global economic recovery progresses.
Quarterly earnings results
On Feb. 4, the company reported its third-quarter fiscal 2021 financial results (fiscal year-end is March 31).
Adjusted earnings before interest, taxes, depreciation and amortization EBITDA) was $431-million, surpassing the consensus estimate of $405.5-million. Adjusted earnings per share came in at 55 cents, above the Street’s forecast of 47 cents. The share price advanced 4.5 per cent that day, closing at $35.35. The following day, the share price rallied an additional 4.4 per cent to close at $36.90.
On the earnings call, president and chief operating officer Kai Bockmann briefly highlighted part of the company’s global strategic plan, which will be fully detailed on June 3, “In relation to the merger of our two legacy divisions, Saputo Cheese USA and Saputo Dairy Foods, we are well on our way to developing a game plan that will take our largest division to the next level. Very excited about some of the strategic pillars our teams will be tackling to drive our U.S. business moving forward. These include increasing the value of our ingredients business, ramping up our core portfolio, optimizing our integrated business processes, leveraging ERP to increase efficiencies, optimizing our network and ramping up our dairy alternatives business… The U.S. plan will be part of our global strategic plan, which we look forward to sharing with you … It will lay out how we will drive accelerated growth across all our business to complement our growth that we will continue to drive through M&A [mergers and acquisitions].”
On June 3, the company will be releasing its fourth-quarter fiscal 2021 financial results. The consensus EBITDA estimate is $365-million and the consensus earnings per share estimate is 39 cents. Management will be hosting a conference call that day beginning at 1:30 p.m. ET.
Dividend policy
The company pays its shareholders a quarterly dividend of 17.5 cents per share or 70 cents per share yearly, equating to a current dividend yield of 1.7 per cent.
Looking back over the past decade, management has announced a dividend increase in August of each calendar year.
Analysts’ recommendations
There are nine analysts who actively cover this consumer staples stock, of which five analysts have buy recommendations, two analysts have neutral recommendations, and two analysts have “sell” recommendations (Erin Lash at Morningstar, and Jim Marrone at Accountability Research)
The nine firms providing recent research on the company are: Accountability Research, BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, Morningstar, National Bank Financial, RBC Dominion Securities, Scotia Capital and TD Securities.
Revised recommendations
Earlier this month, two analysts revised their expectations.
- Desjardins Securities’ Chris Li upgraded the stock to “buy” from a “hold” recommendation and increased his target price to $45 from $42.
- National Bank Financial’s Vishal Shreedhar raised his target to $40 from $39.
Financial forecasts
The consensus EBITDA estimates are $1.53-billion in fiscal 2021, $1.68-billion in fiscal 2022, and $1.79 in fiscal 2023. The consensus earnings per share estimates are $1.72 for fiscal 2021, $1.96 for fiscal 2022, and $2.14 for fiscal 2023.
Valuation
According to Bloomberg, the stock is trading at a price-to-earnings multiple of 21.4 times the fiscal 2022 consensus estimate, in-line with its three year historical average of 21.9 times. The stock is trading at an enterprise value-to-EBITDA multiple of 12.5 times the fiscal 2022 consensus estimate, relatively in-line with the three year historical average of 12.8 times.
The average one-year target price is $41.71, suggesting the stock is fairly valued at current levels. Individual target prices are as follows: $30 (from Erin Lash at Morningstar), $35, $40, $41, $43, two at $44, $45, $46 (from RBC’s Irene Nattel).
Insider transaction activity
Quarter-to-date, there has not been any trading activity in the public market reported by insiders.
Chart watch
Year-to-date, the share price is up 17.7 per cent, outperforming the S&P/TSX composite index, which is up 13.9 per cent and also outperforming the S&P/TSX consumer staples index, which has rallied 7.8 per cent.
Prior to COVID-19, the share price was consolidating in a trading range, trading largely between $40 and $45 for the past three years (from the start of early 2017 to early 2020). The share price has finally recovered back to pre-COVID levels, closing at $41.92 on May 28.
Last week, the share price broke above major resistance, crossing above $40 on high volume. On May 25-26, over 1.4 million shares traded each day, well above the three-month daily average trading volume of approximately 685,000 shares.
In terms of key technical resistance and support levels, the share price has initial overhead resistance between $45 and $46. After that, there is a ceiling of resistance between $47.50 and $48.50, close to its record closing high of $48.52 reached in Jan. 2017. Looking at the downside, there is initial technical support between $39 and $40, near its 50-day moving average (at $39.16). Failing that there is support around $37.50, and then around $35.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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