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Saputo founder and chairman Lino SaputoGraham Hughes

As global stock markets wobble, investors are developing an appetite for cheese.

Saputo Inc. shares have risen almost 6 per cent in heavy trading over the last two days, showing that many investors do still care about fundamentals, despite growing anxiety about European sovereign debt and a slowing U.S. economy.

Saputo is the largest dairy processor in Canada and one of the biggest in the world, producing cheese, yogurt, snack cakes and other foods. It's praised for making smart acquisitions and integrating them effectively. It also boasts a record of regular share buybacks and dividend hikes.

On Monday, RBC Dominion Securities Inc. analyst Irene Nattel upgraded her rating on the stock to a "buy," saying the shares appeared cheap after a selloff last month and based on strong dairy markets and the company's better-than-average profitability.

Ms. Nattel said an 18-per-cent selloff following quarterly results last month was not justified and left the shares of Quebec-based Saputo trading at bargain valuations compared with other top-tier food processors such as General Mills Inc. and H.J. Heinz Co.

She raised her rating to "outperform," becoming the second of the seven analysts following Saputo to consider the company a "buy." The other five rate it a "hold." Her price target of $49, based on a price-to-earnings multiple of 16, implies a return of more than 22 per cent based on Tuesday's close of $40.

Many investors cut their holdings in the stock following quarterly results. While revenue increased 14 per cent and profit climbed 13 per cent in the three months ended June 30, the company missed share profit expectations by 3 cents and reported a decrease in EBITDA (earnings before interest, taxes, depreciation and amortization) margin for its business outside the United States.

Candice Williams, of Canaccord Genuity Corp., noted that this was the second consecutive quarter of such margin compression. Although she expects margins will rise again, it is a metric to monitor during upcoming quarters, she said.

Lino Saputo Jr., the chief executive officer, told analysts that although demand slowed in Canada, management is mitigating declines with value-added specialty categories such as flavoured milks. At the same time, international operations are feeding expansion.

"The way we look at it, Canada is a very good, solid platform, less volatility, less disruption in day-to-day business, but a lot more competitive and a lot more challenging in terms of gaining market share or growth," he said on a conference call last month. "We can see growth in the United States - no limitations there. There is growth in Argentina. We have grown in Europe."


Over the last decade, the company has spent more than $1.5-billion on acquisitions, including a $270.5-million deal this spring for Fairmount Cheese Holdings Inc., which is helping boost U.S. revenue. Ms. Nattel thinks that further acquisitions will play a key role in growth, with management particularly interested in U.S. and Australian targets.

"Saputo has generated significantly above-average earnings growth through successful, accretive acquisitions, and enjoys a balance sheet that could support incremental debt in the order of $2.5-billion," she wrote in a research report published this week.

Others are not so sure. Canaccord's Ms. Williams agrees that investors overreacted to quarterly results. But Saputo shares are among the most expensive of the consumer products companies that she follows and she thinks that earnings growth, while still strong, will "moderate" during this fiscal year and next. She recently advised clients to "wait for a more attractive entry point." She rates the shares "hold" and has a $45 target on the stock based on a multiple of 10.4 times estimated EBITDA for next fiscal year.

And Mark Petrie, of CIBC World Markets Inc., recently trimmed his price target on the stock to $46, from $48, citing "a slightly less favourable pricing environment." Specifically, U.S. cheese prices have fallen from their high faster than expected in recent weeks and changes effective this month to the milk pricing model in California are translating into higher milk costs for Saputo.

He views the shares as "a relatively safe place to hide" relative to other consumer products companies. But he suggests that investors would find even greater safety in grocery and drugstore chains.