Analyst Actions: Credit Suisse Keeps Saputo at Neutral as EPS Misses Target

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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."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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