Lacking a Competitive Edge, Saputo Remains Vulnerable to Softer Consumer Demand and Macro Headwinds

Despite Saputo's extensive portfolio of dairy products spanning the cheese, cooking spray, and spreads aisles, its exposure to a highly commoditized industry means fluctuations in raw material prices (which account for up to 85% of Saputo’s costs) can limit the firm’s control of profitability. More critically, we believe the lack of differentiation between its products and those of branded competitors and private label fails to suggest the existence of a brand intangible asset. Further, we believe Saputo hasn't carved out an economic moat due to consolidation among dairy producers, which have amassed greater control over the price of raw milk. As a result, we expect Saputo to generate low-single-digit revenue growth over the next 10 years (generally in line with the overall dairy market, which we expect to grow around 2%-3%) and an average return on invested capital (including goodwill) of 8.5% over the next 10 years (just a touch above our 8% weighted average cost of capital estimate).