Hi there,
Saputo has certainly struggled since the pandemic began. The company's stock price is down 20% year to date and by almost 8% over the past couple of weeks. The company is nearing oversold territory with a 14-day RSI of 32.22.
Why has the company struggled? As you pointed out, Saputo is often viewed as a defensive stock since it produces food products (dairy and cheese). However, while retail sales have increased the sales in the food service and industrial segments are are struggling. Although more folks are eating at home, less are dinning out and since big events/meetings are virtually non-existent, the catering industry is struggling. Worth noting, retail accounted for 49% of revenue in fiscal 2020 (ended March 31, 2020), while Food Service and Industrials accounted for 34% and 17% respectively. These two segments are likely to remain pressured until the economy emerges from the pandemic. On the bright side, despite a dip in revenue the company remains highly profitable and actually increased profits by 16.9% last quarter (the COVID-19 quarter).
The company is now trading at 19 times forward earnings, 2.02 times book value and an EV/EBITDA ratio of 12.74. Although all of these are below historical averages, the lower valuation is justified as growth is going to slow as a result of the pandemic. That being said, in fiscal 2022 revenue is expected to grow by 4% while earnings are expected to jump by 21%. Take these estimate with a grain of salt however, as they have been revised lower. In comparison, the company has 10.7% and 4.8% revenue and adjusted earnings compound annual growth rates. So although revenue is slowing, profit is expected to remain strong.
This bodes well for future dividend growth. The company has a 20-year dividend growth streak over which time it has grown the dividend by the low, single digits. There is no reason the company cannot extend its growth streak given its low payout ratio (~40%) but it could err on the side of caution and keep its dividend steady until there is more economic clarity. Many dividend growth stocks have taken this approach.
Overall, Saputo is a solid company and provides decent risk-to-reward prospects. It is now trading near March lows, and it is likely that the downside is limited from here. I say this, however in this environment it could easily drop to March lows or even below if we see massive global shutdowns again. On the flip side, it has the potential to rebound in a pretty decent way once the economy is truly re-open. Given our current situation, patience will definitely required and averaging into a position is a good strategy to use here.
Mat