2023-10-03 10:19:41 ET
Summary
- Amcor produces packaging products, mostly made of plastic, for businesses and has large customers such as Unilever, Nestle, P&G, PepsiCo, and Coca-Cola.
- The company currently has a quite good dividend compared to the company's low-risk industry in which it operates.
- Amcor has a history of low organic growth only boosted by acquisitions - although the company's valuation seems very modest, my DCF model points towards a fairly valued stock.
Amcor plc ( AMCR ) produces packaging products for businesses. Although the packaging demand seems to stay very stable during economic turbulence, Amcor has some risk as the company holds a large amount of long-term debt. As my DCF model currently estimates the stock to be fairly valued, I have a hold-rating for Amcor.
The Company & Stock
Amcor provides packaging products to multiple sectors – the company has numerous segments in which the company provides its offerings:
The company has multiple very large customers, as Amcor’s customers include companies such as Unilever (UL), Nestle (NSRGY), P&G (PG), PepsiCo (PEP), and Coca-Cola (KO).
Most of Amcor’s products are made of plastic. I believe it is important that Amcor finds a sustainable and recyclable way to produce plastic as more companies are starting to focus on sustainability in their packaging. The company does actively focus on the sustainability aspect – for example, the company’s flexible packaging has become a lot more recyclable in the past couple of years.
August 2023 Investor Overview Presentation
Amcor’s stock began trading in June of 2019. Since then, it has lost around 18% of its value:
After a relatively large price crash after 2022 highs, the company currently trades at quite a good dividend yield – with an estimated forward dividend yield of 5.35%. As packaging products have a quite low risk profile, the yield seems quite safe.
Financials
In the company’s long-term history, Amcor has achieved some growth, although quite low – the company’s compounded annual growth rate from FY2003 to FY2023 has been 3.5%:
Author's Calculation Using TIKR Data
The growth has been achieved as a combination of quite poor organic results as well as acquisitions and divestures. Most notably, Amcor’s strategy revolved around a large amount of acquisitions, as from FY2003 to FY2023 the company has around $6.8 billion in cash acquisitions, most of which were made before FY2017:
Author's Calculation Using TIKR Data
The acquisition pace has slowed down significantly after FY2017, as the company only has two small acquisitions after the year. Although the acquisitions have slowed down, Amcor still actively pursues strategic M&A as a part of the company’s strategy. As the acquisitions from FY2003 to FY2023 account for a third of Amcor’s current enterprise value, it seems that Amcor’s organic growth for the period has been quite poor.
From FY2003 to FY2023, Amcor’s average EBIT margin has been 8.0%. The company has achieved a better-than-average margin consistently after fiscal year 2013, though – after the year, Amcor has achieved a margin above 10% on most years with an average of 10.4% from FY2013 to FY2023:
Author's Calculation Using TIKR Data
The margin seems to be mostly stable even in macroeconomic turbulence – currently, the trailing EBIT margin stands at 9.7%, only slightly below FY2022’s margin of 10.1%. The resilience is further demonstrated in the company’s performance during the 2008 financial crisis, as the margin fell only by 0.7 percentage points in FY2008 and stayed flat in FY2009.
Amcor has a large amount of debt – currently, the company has around $6.7 billion of long-term debt on its balance sheet and $80 million in short-term borrowings. Compared to the company’s market capitalization of around $13.0 billion, the amount seems quite high. I do believe, though, that Amcor can manage the debt – as discussed earlier, the company’s earnings stay quite stable in unstable times. Also, interest expenses are only around a fifth of the company’s EBIT with trailing numbers; the debt seems to be a rational choice for the company as a form of cheap financing, although the debt does somewhat raise investors’ risk level.
Valuation
Amcor currently trades slightly below the stock’s average forward price-to-earnings ratio of 14.9, as the current forward ratio stands at 13.3:
The ratio seems quite low as Amcor is mostly a low-risk company – the ratio is well below the S&P 500’s P/E of 24.4 . As the company’s historical organic growth has been low, though, the low ratio could be justified – so as usual, I constructed a discounted cash flow model to further analyze the valuation.
In the model, I estimate a real growth near zero as I don’t model in acquisitions – my model estimates a growth of 1% for the current fiscal year of 2024 as a result of possibly softer demand. After the year, I estimate the growth to stay at a perpetual rate of 2%. As for the company’s EBIT margin, I estimate a margin of 9.4% for FY2024 as a result of softer demand – the margin is somewhat below Amcor’s FY2013 to FY2023 average of 10.4%. After FY2024, I estimate the margin to scale back into the average of 10.4% in two years.
The mentioned estimates along with a cost of capital of 7.73% craft the following DCF model scenario with an estimated fair value of $8.98, very near the current price:
DCF Model (Author's Calculation)
The weighted average cost of capital used is derived from a capital asset pricing model:
CAPM (Author's Calculation)
In Q4 of FY2023, Amcor had $77 million in interest expenses. With the company’s outstanding interest-bearing debt, the company’s interest rate comes up to 4.53%. Amcor leverages a large amount of debt as a form of financing, as the company’s main business is very recession-resistant – I estimate the company’s long-term debt-to-equity ratio to be around 35%.
On the cost of equity side, I use the United States’ 10-year bond yield of 4.68% as the risk-free rate. The equity risk premium estimate of 5.91% is Professor Aswath Damodaran’s latest figure for the US. Yahoo Finance estimates Amcor’s beta to be 0.86 – despite the company having a large amount of outstanding debt, the stock is resistant to economic fluctuations as packaging demand is extremely stable. Finally, I add a small liquidity premium of 0.3% crafting a cost of equity of 10.06% and a WACC of 7.73%.
Takeaway
Although the company operates in a low-risk industry, I don’t believe the currently quite modest P/E ratio constitutes a significantly good price point for an entry. As Amcor has leveraged a high amount of debt, the company’s risks are slightly leveraged, and the company hasn’t had a very good history of bringing in organic growth. As my DCF model estimates the stock to be valued fairly, I have a hold-rating for the time being.
For further details see:
Amcor: Good Dividend But Mediocre Growth