Q3/13 EPS Miss: "Saputo reported EPS of C$0.65, below our/Street
estimate of C$0.67/C$0.66. Sales were $1.8 bn, below our/Street
forecast of C$1.82/C$1.85 bn. The increase was due mainly to a
higher average cheese block price YoY ($1.96 vs. $1.76), which
increased revenue by ~$44 mm, but was offset by lower US volumes.
Increased mix/lower ingredient costs contributed to increase in
EBITDA in Canada. EBITDA margin increased to 11.8%--53 bps below
our 12.3% forecast. SAP purchased $16.1 mm of shares in Q3/13."
Our Takeaway: "The low-single-digit decline in volume in the US
is not a concern. As management stated, organic growth is unlikely
to drive tremendous value in the shares-acquisitions will. But the
timing of acquisitions is difficult to predict. Management seemed
to indicate small tuck-in acquisitions were more likely in the
short-term despite SAP having capacity to add $2-2.5 bn worth of
debt. But not all acquisitions generate significant value. In our
initiation of coverage report, we raised concerns that SAP bought
Morningstar at a lofty price. From the Q3/13 release, we learned
that goodwill ($903 mm) represented 63% of the Morningstar
transaction price, which compares to 33% for previous large
acquisitions. Will ROIC from the deal exceed the WACC over the
longer-term? How much is a tuck-in acquisition, or the benefits
from deregulation required (if at all) to skate Morningstar onside?
It appears that only a new Trans-Pacific trade pact could have a
transformational impact on the quota system in Canada."
Investment Thesis: "SAP generates strong FCF, has a solid
balance sheet and a well-respected management team--attractive in
an uncertain market. However, uncertainty with future acquisitions
and the potential for deregulation in Canada could cause near-term
disruption to SAP's business. Maintain Neutral Rating, TP of C$51:
EPS forecasts unchanged."