WEEKLY STOCK COMMENT: AMCOR (AMC)
Roy Davidson, 15 June 2017
Amcor (AMC) is one of the world’s largest packaging companies. The company has a global footprint and a broad range of rigid and flexible packaging products servicing the food, beverage, healthcare, home and personal care, and tobacco packaging industries.
AMC has grown from its origins in Australia into a true global packaging player with more than 29,000 employees in over 40 countries. AMC has been able to achieve this through a combination of organic growth and successful acquisitions. One such acquisition was the transformational purchase of Alcan Packaging from Rio Tinto in 2010. The Alcan Packaging acquisition added approximately US$4.1bn in sales and 14,000 employees across 80 plants in 28 countries. It also increased AMC’s revenue by 50% and earnings by 40%. The company has continued to make strategic acquisitions since then and continues to assess opportunities.
While AMC’s pursuit of acquisitions and operations in emerging markets (30% of sales) provide earnings growth potential, the end markets the company serves are very defensive, with demand less linked to economic conditions. Around two thirds of overall sales are from the food and beverage sectors, with healthcare, tobacco and home and personal care making-up the remaining third.
AMC was expected to report a weaker result for the first half of 2017, with Venezuela impacting and some destocking amongst tobacco customers. However, AMC’s result came in ahead of expectations with the company’s North American rigid plastics business the standout, while flexibles was solid overall. This saw the company reiterate its FY17 guidance and again highlighted the defensive nature of AMC’s earnings which we find especially appealing in the current environment.
AMC has a high degree of exposure to emerging markets with over 30% of sales coming from that segment. However, its sales tend to be more defensive in nature (food, beverage, pharmaceutical, tobacco) which insulates AMC more than most. AMC also has a history of innovating and we expect this to be a source of continued competitive advantage. The balance sheet remains sound and the company has competitive advantages based on its market leading position and global operations. The weaker Australian dollar is a benefit for AMC’s share price and the company’s share buyback programme will provide ongoing support.
Risks to AMC include; 1) increased competition, 2) economic downturn, and 3) technological change.