Hercule de Charlevoix is bottom right, Jalapeno Thunder Oak Gouda is top right, Provincial smoke is top left and cheese curds bottom left.Fred Lum / The Globe and Mail)
People usually smile when they say "cheese!", but not since Saputo Inc. reported better-than-expected quarterly earnings on Monday. The shares have dipped slightly since then, partly because the Canadian cheese maker missed expectations on the revenue side, and partly because analysts haven't come to a consensus on whether the results are really good or just good.
On the bullish side, Michael Van Aelst at TD Newcrest maintained a "buy" recommendation on the stock and raised his 12-month price target to $44, up from $38 previously.
"Saputo delivered another very impressive quarter as profits in all divisions exceeded expectations," he said in a note. "Margins in Canada, Europe and Argentina spiked to near record levels (despite lower volumes in Canada) while U.S. margins hit the highest level in seven years."
He believes these margins are sustainable, and boosted his estimated earnings for fiscal 2011 to $2.30 a share from $2.19 previously. As for the revenue miss, he shrugs off the disappointment: "Saputo is not really a top-line growth story, but one of growth through acquisition and continuous operational improvement," he said.
Meanwhile, Martin Landry at Desjardins Securities maintained a "hold" recommendation on the stock, but bumped up his 12-month price target to $37 from $33. In contrast to Mr. Van Aelst, Mr. Landry is less optimistic about Saputo's expanding profit margins and believes that the current share price adequately reflects the company's future prospects.
Rising cheese prices helped Saputo in its fiscal second quarter, but futures activity shows signs that the trend could be sputtering.
"We believe that the rate of margin expansion will slow considerably in the coming quarters, as most of the benefits from the firm's [capital expenditure]investments have been fully realized," Mr. Landry said in a note. "In addition cheese price futures point to lower prices versus current levels, which could result in negative inventory price realization."
David Berman