With or without a recession, the world will continue to move towards a sustainable planet. Ahead of World Environment Day, where individuals around the world come together and take action to protect the environment, having skin in the paper packaging industry is one way to support and raise awareness of this year’s theme, “Only One Earth”.
Amcor plc (New York Stock Exchange: AMCR) is a global leader in the design and manufacture of high quality, innovative packaging solutions used by leading medical and consumer brands. AMCR primarily operates in the United States and Europe, where most of its revenue is derived from these regions and employs approximately 46,000 employees worldwide.
AMCR continues to invest heavily in new technologies to improve its operational efficiency and reduce its environmental footprint. The company has entered into a partnership with ExxonMobil Corporation (XOM) to provide them with advanced recycling technology to expand their portfolio serving the health and food industry.
AMCR has strong profitability where its revenue is expected to increase by $14.32 billion according to analysts, it maintains a liquid balance sheet and has a strong catalyst for total shareholder return; this stock is a buy on its potential decline.
Amcor Commitment 2025
Amcor has a strong track record of sustainable packaging innovations. In fact, the company recently launched AMFiber, its latest paper-based packaging product. This shows their strong commitment to having 100% of their product portfolio be recyclable or reusable by 2025. As consumers become more aware of climate change, demand for AMCR’s products will increase as they continue become part of consumers’ daily lives, whether for food or medicine.
It is evident to see that the majority of analysts covering the AMCR have a positive view of its future potential, as seen in the image above.
A sustainable AMCR
In addition to its innovations, AMCR boasted of improved capacity in its global operations, resulting in 15.62% year-on-year growth in Q3 2022, amounting to $3,708 million , compared to $3,207 million in the same quarter last year. In addition, management reassures that it does not see any shortages related to its organic growth and will continue to invest in improving its overall capacity.
… We have increased CapEx by approximately 15% per year, including in the current fiscal year 2022, as Michael mentioned and we expect this to bring our CapEx to sales ratio up from the historical range of 3 % to 4% to 4% to 5% on a continuous basis. We have a number of projects already underway or nearing completion which will generate attractive returns and drive organic growth in the future. This slide shows some examples.
In Brazil and the UK, we are adding multi-layer film production capacity to meet growth in priority healthcare and meat segments.
In Ireland, we are adding new state-of-the-art thermoforming capabilities to strengthen our leadership position in medical packaging.
…in Italy, we are increasing the production capacity of one of our global AmLite Heatflex product platforms. And since launching this ready-to-recycle pouch for autoclavable applications, we have seen significant interest from a long list of customers and the majority of this new capacity has already sold out. Source: Q3 2022 Earnings Call Transcript
AMCR continues to release catalysts of added value with its improving margin, thanks to its effective hedging strategy and its synergies. In fiscal 2022, management expects its 2019 Bemis integration plan to begin delivering more than $180 million in pre-tax savings, better than it expected in fiscal 2022. the 2019 financial year.
Additionally, the company managed to hedge its two main raw materials, reducing some of its capacity and increasing input cost risk. I think it’s reassuring and relevant in these uncertain times.
Still basically intact
Another value-added catalyst for AMCR is that it has strong cash flow potential and is well positioned to shine in today’s bear market. The company is undervalued at its P/E ratio of 20.34x versus its 5-year average of 24.76x. Although it looks overvalued compared to its industry’s median P/E ratio of 14.42x, AMCR is delivering faster revenue growth (5 years) at 8.85%, better than international paper company (PI) with 0.50% and WestRock Company (WRK) with 7.18%. I think it’s still cheap at today’s price, especially considering its intrinsic value of $17 derived from my DCF and its simple relative valuation.
I completed my DCF model using expert projections and continue to project a conservative rate of 2.2% for fiscal 2025 and 2026. Despite its bullish operating margin outlook, I started a number in down 10.8% from its 11.2% in FY2021 and I projected a conservative growing number in line with its improved synergies. I also assumed a higher CAPEX investment and a higher discount rate of 5.5% compared to its calculated WACC of 4.5%. To sum up, with all the other assumptions outlined in the image above, I arrived at a conservative intrinsic value of around $17.
Third quarter 2022 key financial performance
AMCR’s total revenue was $3,708 million this quarter, compared to $3,207 million in the year-ago quarter. On a 12-month basis, the company generated $14,089 million higher than the $12,861 million recorded in fiscal 2021 and its $12,468 million in fiscal 2020.
In today’s challenging environment, it’s surprising to see a company post positive gross profit growth. AMCR posted higher gross profit of $731 million, up from the same quarter last year. However, as a percentage, the company’s gross margin fell from 21.27% in Q3 2021 to 19.71% in Q3 2022. This is due to its inflated cost of revenue; however, I think its hedging materials will help control its margins if the worst gets worse.
On top of that it snowballed its operating profit where we are seeing positive dollar growth from $350 million in Q3 2021 to $404 million this quarter but also led to lower operating margin of 10.90% this quarter, down to 10.91% in the same quarter last year. If you will notice, the drop is not that big compared to its gross margin and this is due to its efficiency on its selling and general expenses. Additionally, with over $180 million in cost synergies, we can assume a growing or at least controlled margin in its future financial reports.
Looking at AMCR’s net profit, it rose to $269 million from $267 million in the same quarter last year. In addition to its high P/E multiple, which may seem unattractive to some value-oriented investors, its decelerating margin poses a significant risk this quarter. In fact, AMCR also produced a slowing net margin of 7.25%, down to 8.35% in the same quarter last year.
Finally, due to growing net income in dollars, AMCR generated growing earnings per share (EPS) of $0.18 this quarter, compared to $0.17 recorded in the same quarter of 2021. From another perspective, the The company’s EPS is already at $0.62, which is higher than the $0.6 recorded last fiscal year and $0.38 in fiscal 2020.
An all-time high in today’s bear market?
Recently, AMCR managed to create a new 52-week high at around $13.18 following the release of its positive Q3 2022 results. However, despite its strong quarter, it was rejected and is trading lower at the moment. to write these lines. What does this mean for AMCR investors? With a dividend yield of 3.75%, any decline, especially after 10%, not only improves the company’s dividend yield, but also provides investors with a better entry point to average down. The price remains above its simple moving average, indicating bullish price action. This is the confluence with its MACD which is trading above the zero line, expressing the same sentiment with its moving average indicator.
AMCR is benefiting from a good outlook from management, which sees its adjusted EPS increase from 9.5% to 11% in fiscal 2022. If you take a look at the quoted executive transcript here Below, you’ll notice how the war between Russia and Ukraine can affect AMCR’s operations in both its income statement and balance sheet.
As a reminder, the four sites in Ukraine and Russia together represent around 2 to 3% of Amcor’s annual sales, around 4 to 5% of annual EBIT and around 200 to 300 million dollars on the balance sheet. Source: Q3 2022 Earnings Call Transcript
Despite this, management provided a powerful catalyst that the market ignored on top of this double-digit EPS growth. According to them, these figures already exclude income from its operations in Ukraine.
It’s also important to note that our full-year 2022 guidance assumes no further earnings from activity in Ukraine last quarter and takes into account a range of possible outcomes in Russia. Source: Q3 2022 Earnings Call Transcript
AMCR has a strong buyout catalyst where $423 million of shares were bought back and were canceled during the buyout. Additionally, management expects a total of $600 million for fiscal 2022 on top of its growing quarterly dividend of $0.12, up from $0.1175 last year.
Even though AMCR remains liquid and has a sustainable dividend, its growing total debt of $7,762 million affects its D/E ratio of 1.72x, compared to 1.52x in Q3 2021, and its debt/EBITDA ratio of 3 .60x, which is unfavorable compared to 3.49x in the third quarter of 2021. Despite the increase in interest payments, the company’s interest coverage ratio set a new record high of 9.92x.
Its growing EPS, strong cash flow generation, sustainable dividend and large buybacks in addition to its hedged commodities, which can potentially support another year of business operations, are stronger than its margin in slowdown and negative sentiment of a broad bearish macro-environment exacerbated by the war between Russia and Ukraine. At today’s weakness, Amcor is a buy.
Thanks for reading and good luck to all of us!