SAP

SAPUTO INC. $22 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 207.1 million; Market cap: $4.6 billion; Price-to-sales ratio: 0.8; SI Rating: Average) is Canada’s largest producer of dairy products such as milk, butter and cheese. It also has operations in the United States, Argentina and Europe. Last December, Saputo bought Neilson Dairy, the dairy division of Weston Foods, for $465 million. Neilson makes a wide variety of dairy products in Ontario, and generates $600 million a year in sales. Thanks to Neilson, as well as Saputo’s earlier acquisition of a Wisconsin-based cheese maker for $161 million, its revenue rose 14.5% in the fiscal year ended March 31, 2009, to $5.8 billion from $5.1 billion in the prior year....

All three of these leading Canadian food processors are down from their 2008 highs. However, they should all benefit from falling prices for wheat and other raw materials. As well, the recession may actually help their sales by prompting more people to eat at home. Even so, we only see two of them as buys right now. SAPUTO INC. $22 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 207.1 million; Market cap: $4.6 billion; Price-to-sales ratio: 0.8; SI Rating: Average) is Canada’s largest producer of dairy products such as milk, butter and cheese. It also has operations in the United States, Argentina and Europe. Last December, Saputo bought Neilson Dairy, the dairy division of Weston Foods, for $465 million. Neilson makes a wide variety of dairy products in Ontario, and generates $600 million a year in sales....

Cisco Systems Inc., $18.79, symbol CSCO on Nasdaq (Shares outstanding: 5.8 billion; Market cap: $109.6 billion), is a leading maker of products that link and manage computer networks. These include routers, local-area network (LAN) and asynchronous transfer mode (ATM) switches, dial-up access servers and software. Cisco’s IOS (Internet Operating System) software ties these products together, delivers network services (which interconnect and move information between networks) and enables programs to run on networks. Cisco gets about 46% of its revenue from overseas customers. In its third fiscal quarter, which ended April 25, 2009, Cisco’s revenue fell 16.6%, to $8.2 billion from $9.8 billion a year earlier. Excluding one-time items, its earnings fell 24.1%, to $1.8 billion, or $0.30 a share, from $2.3 billion, or $0.38. The company bought back 77 million shares during the quarter, at a cost of $1.2 billion. The recession continues to hurt demand for Cisco’s products. To cope, the company plans to lower its expenses by $1 billion during its current fiscal year, including laying off up to 2,000 workers (or 3% of its workforce)....

NOVA CHEMICALS CORP., $1.99, Toronto symbol NCX, fell sharply after it renegotiated the conditions of its lending agreements. To avoid breaching certain covenants, which would require Nova to repay all of its loans immediately, the company must now raise $100 million U.S. in new financing by February 28, 2009, plus an additional $100 million U.S. by June 1, 2009. To meet these conditions, the plastic and chemical maker may have to issue new shares at depressed prices. (Demand for plastics is highly cyclical, and the slowing economy has hurt Nova’s sales and earnings.) This could substantially dilute the current value of its shares. As well, if Nova needs to borrow more money, it would likely have to pay much higher rates, which would drive its interest costs up. Nova has significant operations in Alberta, so it may receive temporary assistance from the Alberta government. As part of any refinancing plan, Nova would probably have to suspend its quarterly dividend payments of $0.10 (Canadian) a share. The dividend now yields a high 20.1%, and cost Nova $31 million U.S. in 2008....

SAPUTO INC. $20 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 206.8 million; Market cap: $4.1 billion; Price-to-sales ratio: 0.8; SI Rating: Average) is Canada’s largest producer of dairy products including milk, butter and cheese. Its main dairy brands include Saputo, Stella and Dairyland. Saputo also makes snack cakes and tarts. Saputo reached its current size mainly through acquisitions outside of Canada. Recent purchases include the west coast industrial cheese business of U.S.-based Land O’ Lakes Inc. for $249.2 million, and a Wisconsin-based cheese maker for $161.0 million. Saputo has also used acquisitions to expand to Argentina and Europe. Its international operations now supply about 40% of its revenue, and 30% of its earnings. Expanding through acquisitions is riskier than internal growth. Saputo cuts this risk by identifying smaller, less efficient businesses that would benefit from its economies of scale and marketing expertise....

Our long-standing advice is to invest in well established companies and spread your funds out across the five main economic sectors: Manufacturing & Industry, Resources & Commodities, the Consumer sector, Finance and Utilities. Generally speaking, stocks in the Resources & Commodities sector and the Manufacturing & Industry sectors expose you to above-average volatility, while those in the Finance and Utilities sectors involve below-average volatility. Consumer sector stocks tend to fall in the middle. We prefer to zero in on Consumer stocks with the size and brands to overcome short-term setbacks, and succeed over the long term....

Oracle Corp., $17.11, symbol ORCL on Nasdaq (Shares outstanding: 5.05 billion; Market cap: $86.3 billion), makes and sells database software and middleware (software that connects computer servers). Companies use Oracle’s database-management software to store and access data. Oracle also offers software for data warehousing, customer relationship management and supply chain management. In the three months ended November 30, 2008, revenues rose 6%, to $5.7 billion from $5.4 billion a year earlier. Earnings rose 8.2%, to $1.75 billion, or $0.34 a share, from $1.6 billion, or $0.31 a share. Oracle spent 11.6% of its sales in the quarter on research and development. In the latest quarter, new software license sales fell 3%, software updates and product support were up 15% and services fell 2%. Services contributed 20% of sales, while software accounted for 80%. Geographically, revenues from the Americas rose 8.6%, Europe, Africa and the Middle East, 1% and the Asia Pacific region, 6.2%....

I still feel that government efforts now underway are likely to solve today’s financial crisis. However, these steps come at a price. My best guess is that we’ll see much higher inflation as a result of all this newly supplied liquidity, probably in the early part of the next decade. My view is that you should keep this inflationary potential in mind, but it’s too early to try to profit from it. That’s partly due to the drawbacks of Resources stocks. They do provide a handy hedge against inflation, and even many of the most pessimistic observers now feel that resource prices are bound to rise in the next few years, as millions of Indian and Chinese workers pole-vault into the middle class. But many pessimists felt the same way following the last great resource and commodity boom, in the 1970s and 1980s. After that boom ended, the sector went into a slump that lasted 15 years or more....

SAPUTO INC. $28 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 206.4 million; Market cap: $5.8 billion; SI Rating; Average) is Canada’s largest producer of dairy products, including milk, butter and cheese. It also produces dairy products in the United States, Argentina and Europe. These operations account for 97% of its revenue. The remaining 3% comes from its bakery operations, which make snack-cakes, cookies and tarts. Much of the company’s recent growth comes from 16 acquisitions of bargain stocks over the past 10 years. We generally downplay companies that expand through acquisitions, due to the hidden risk that comes with most new purchases. However, Saputo has a strong record of picking up struggling operations with bargain stocks and quickly turning them around.

Focused on international markets

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LINAMAR CORP. $13 (Toronto symbol LNR) has paid an undisclosed sum for a plant in Swansea, Wales. This is Linamar’s fifth plant in Europe, and 38th over all. The facility makes automotive engines. However, Linamar plans to install new equipment that will let the plant produce a wider variety of automotive parts. Expanding in Europe also helps cut the company’s exposure to the slowing North American auto industry. Best Buy. SAPUTO INC. $27 (Toronto symbol SAP) will have to change the way it makes some of its cheeses, due to new federal standards that require it to use more full-fat milk and less milk solids. That could increase its operating costs. Saputo will probably try to offset these higher input costs with productivity gains instead of raising selling prices, which could hurt its sales growth. Best Buy. CGI GROUP INC. $10 (Toronto symbol GIB.A) continues to renew existing contracts. It has just signed an $80 million U.S., seven-year contract renewal with Australia and New Zealand Banking Group Ltd. and Bank of Montreal. The deal lets these two banks extend their use of CGI’s Proponix global trade platform, which helps them automate overseas transactions made by their clients. Though the deal is small in relation to CGI’s annual revenues of $3.7 billion, it expands its market share and enhances its reputation. Buy.