SAP

BOMBARDIER INC., Toronto symbols BBD.A $8.71 and BBD.B $8.72, rose 7% this week after reporting first quarter fiscal 2009 earnings and revenues that exceeded expectations. In the three months ended April 30, 2008, earnings per share jumped to $0.12 from $0.04 a year earlier (all amounts except share price in U.S. dollars). Revenue rose 20.0%, to $4.8 billion from $4.0 billion, due to strong demand for business aircraft, regional jets and railcars. Thanks to its improving outlook, Bombardier plans to resume quarterly dividend payments of $0.025 (Canadian) a share. That implies an annual yield of 1.1%. The class B subordinate voting shares will also receive an additional priority payment of $0.0015625 (Canadian) a share per year, payable quarterly. That gives the class B shares an annual yield of 1.2%. Bombardier is a buy for aggressive investors. The higher yielding ‘B’ shares are the better choice....

SAPUTO INC. $29 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 205.8 million; Market cap: $6.0 billion; SI Rating: Average) is Canada’s largest producer of dairy products. It accounts for around 35% of Canada’s cheese production, and 25% of milk output. Major brands include Saputo, Armstrong, Stella and Dairyland. Canada supplies 60% of its total sales. The company is also one of the top five cheese producers in the United States, with roughly 5% of that market. Saputo’s U.S. businesses account for 30% of its sales. The remaining 10% of its sales come from dairy operations in the UK, Germany and Argentina. Heavy regulation limits expansion opportunities in Canada, so Saputo has focused on expanding its U.S. and international operations through acquisitions. That’s riskier than internal growth, but Saputo has a strong history of identifying operations that can benefit from its economies of scale and marketing expertise. The high Canadian dollar also makes foreign purchases more affordable....

Saputo has nearly tripled for us since we first recommended it in our April, 2003 issue at $11 a share (adjusted for a 2-for-1 stock split in November 2007). We liked its ability to quickly absorb new operations and improve their profits, which offset the risk of its aggressive growth-by-acquisition strategy. Despite its success, the company receives little broker/media attention. That may be because the dairy industry seems dull to many investors. We still like Saputo’s strategy, and its latest purchases should fuel its growth for years to come....

IBM $106 (New York symbol IBM; SI Rating: Above average) is holding up well, despite the market’s overall weakness, on the strength of record results in the latest quarter. Sales rose 9.9% in the three months ended December 31, 2007, to $28.9 billion from $26.3 billion. Earnings rose 14.1%, to $4 billion from $3.5 billion. Earnings per share rose 23.9%, to $2.85 from $2.30, on fewer shares outstanding from share buybacks. IBM is the world’s biggest supplier of computers and information processing services. The company’s shift over the past few years into higher-margin computer services and software is paying off. Its high research spending ($1.6 billion or 5.5% of sales in the latest quarter) will let it keep adding profitable new products....

INTERNATIONAL BUSINESS MACHINES CORP. $106 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.4 billion; Market cap: $148.4 billion; WSSF Rating: Above average) is the world’s largest supplier of computers and information services. It operates in over 170 countries. IBM has long been a leader in large, mainframe computers for corporations and governments. As well, in the past five years, IBM has expanded its services and software operations through the purchase of over 60 companies for $20 billion. The company is now the world’s second-largest software company after Microsoft Corp. IBM now gets over 50% of its revenue from services, which include designing and maintaining computer systems for its customers. Services also give IBM steady, long-term revenue streams, which helps cut the risk of these acquisitions....

Computer technology stocks are among the most volatile in the Manufacturing & Industry sector of the economy, as we’ve seen with the current market turmoil. We think that the best way to invest in technology is through large, established, broad-based technology companies capable of funding expensive research and bringing new products to market. A great example is IBM. Its wide exposure to hardware and software limits its reliance on any single product. Its focus on computer services also gives it steadier revenue streams than most computer companies....

SAPUTO INC. $28.15, Toronto symbol SAP, has agreed to buy the operations of Wisconsin-based Alto Dairy Cooperative, which makes cheeses under a variety of brand names and private labels. The $160 million U.S. price is 22% more than the $131.0 million (Canadian) or $0.63 a share that Saputo earned in the six months ended September 30, 2007. The new operations should expand revenue at Saputo’s U.S. operations by 20%. The company has a strong history of successfully integrating new operations, which helps cut the risk of expanding through acquisitions. Saputo is a buy....

BANK OF AMERICA CORP. $44.37, New York symbol BAC, has moved down lately along with most financial services stocks, mainly due to concerns over liquidity problems with securities backed by mortgages and other assets. That makes it difficult to assess the market value of these securities. Bank of America will take a $3 billion pre-tax charge in the fourth quarter of 2007 due to writedowns of asset-backed securities. That’s equal to 1.5% of its market cap of $204 billion. Bank of America still has $16 billion worth of these securities, including $12.1 billion tied to subprime mortgages, so it may face more writedowns if conditions worsen. Bank of America closed its subprime mortgage business in 2001, so its overall credit quality is still strong. Its retail banking, credit card and wealth management operations are also performing well....

SAPUTO INC. $49 (Toronto symbol SAP; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 103.7 million; Market cap: $4.6 billion; SI Rating: Average) is Canada’s largest producer of dairy products such as milk, cheese and butter. The dairy division, including operations in the United States, Argentina and Europe, supplies 95% of Saputo’s total revenue. The remaining 5% comes from its bakery operation, which makes snack-cakes, tarts and cereal bars. Saputo’s revenues rose from $3.4 billion in 2003 (fiscal years end March 31) to $4.02 billion in 2006, but slipped to $4.0 billion in 2007. Earnings rose from $1.66 a share (total $173.7 million) in 2003 to $2.20 a share ($232.1 million) in 2005. In 2006, a writedown cut profit to $1.82 a share ($192.1 million). Earnings improved to $2.28 a share ($238.5 million) in 2007.

Saputo looks overseas for growth

Much of Saputo’s recent growth comes from an aggressive acquisition plan, particularly outside Canada. While this increases its risk, Saputo has a long history of success in integrating acquisitions....

SAPUTO INC. $45 (Toronto symbol SAP) has paid $12 million for a UK-based maker of mozzarella cheeses. This is a tiny purchase compared to Saputo’s $4.6 billion market value. But acquisitions like this give Saputo a low-risk way to expand to new markets. Best Buy. FPI LTD. $15 (Toronto symbol FPL) has received permission from the Newfoundland government to try to sell some of its fish harvesting and processing assets. That helped prompt a 50% jump in FPI’s stock price in the past month. However, the stock could drop just as fast if a deal falls through, or political interference prevents FPI from extracting a higher price. Hold. PENGROWTH ENERGY TRUST $19 (Toronto symbol PGF.UN) has stayed in a narrow range for the past few months, mainly due to concerns over Ottawa’s intention to tax trust earnings in 2011. Fears that lower oil and gas prices would force Pengrowth to cut its $3.00 distribution rate (15.8% yield) have also weighed on the unit price. But we feel energy prices will remain steady in 2007. Even if Pengrowth cut the distribution 25%, it would still yield about 12%. Buy....