Saputo Inc. $33 – Toronto symbol SAP

SAPUTO INC. $33 (Toronto symbol SAP; SI Rating: Average) has made itself the top dairy producer in Canada in the past few years through acquisitions. However, heavy regulation limits Saputo’s growth in Canada.

Consequently, the company is aggressively expanding outside Canada. It is targeting the United States where it’s now the fifth-largest cheese producer, and Argentina, where it’s the third-largest dairy company.

Saputo earned $0.43 a share (total $45.0 million) in its third fiscal quarter ended December 31, 2005, down 21.8% from $0.55 a share ($58.3 million) a year earlier.

Higher fuel costs, lower U.S. cheese prices and restructuring costs hurt earnings. But Saputo’s sales rose to $1.02 billion from $942.2 million, due to acquisitions and higher Canadian dairy prices.

Saputo now aims to enter the European market with a deal to buy Germany’s Spezialitaten- Kaserei De Lucia GmbH, which makes specialty cheeses. Saputo did not disclose the price, but this business generates annual revenues of 20 million Euros, or roughly $28 million Canadian. The German acquisition is a low-cost way for Saputo to enter the European dairy market. Once it becomes comfortable there, it will likely pursue more small acquisitions. Germany is also Europe’s largest producer of raw milk, which helps cut the risk of this investment.

Saputo should earn $1.94 a share in fiscal 2006, and the stock trades at 17.0 times that figure. The $0.72 dividend yields 2.2%.

Saputo is a buy for aggressive investors.

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