Q: A recent new guest to BNN’s Market Call made Saputo a top pick. He seemed to have quite a breadth of knowledge on the company and made (to me) a compelling case for Saputo having the potential to do well from its current valuation and that there was too much pessimism on the company and seemed to see a viable path to recovery in areas that have been lagging since the pandemic and a return to previous margins that could support multiple expansion. It seemed a bit contrarian based on momentum and other factors possibly at play right now with respect to tariffs etc., and also interesting as a top pick he will be faced with defending in a years time. Any thoughts since the last question a few months ago (I think you didn't like the momentum but found it was getting “interesting”)?
5i Research Answer:
SAP is cheap, with a nice, secure dividend. Debt is pretty high which would be one concern. But cash flow is solid and steady, with high free cash flow conversion. Consensus calls for 25% earnings growth this fiscal year, with improving margins helping. IF it can execute on this growth, the stock should do better. But we have to note that even with a big improvement, earnings will still barely be above 2017 levels. It has struggled with growth a long time. It also missed earnings 38% of the time. We would consider it OK, on valuation and potential. But we are not ready to put it into the Top Pick category without more proof of improvement.