Intensifying Competitive Pressures Could Thwart Further Appreciation in Saputo's Sales and Margins

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. The consolidation among dairy producers (that have amassed greater control over the price of raw milk) further exacerbates Saputo's standing, in our view. Suggestive of the firm's lack of competitive edge, our forecast average return on invested capital (including goodwill) sits just above our 8% weighted average cost of capital estimate.