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Bemis Company: Expensive Film

November 28, 2012 | About:
Bemis Company Inc. (BMS) is a major supplier of flexible packaging and pressure sensitive materials used by leading food, consumer products, healthcare and other companies worldwide. Founded in 1858, BMS’s flexible packaging business has a strong technical base in polymer chemistry, film extrusion, coating and laminating, printing and converting.

Valuation

BMS is currently trading at a trailing 12 months P/E of 22.72 and a trailing 12 months EV/EBITDA of 9.22. BMS' current valuations represent a 10-year P/E high; its previous P/E peak was 22.09 in 2010. BMS achieved a ROE of 9.4% over the past 12 months and a five-year average ROE of 10.6%.

Financial and Business Risks

BMS is highly geared with a gross debt-to-equity ratio of 93% and a net gearing of 85%. This is partly mitigated by an interest coverage of 5.7. This does not include off-balance sheet liabilities such as operating leases and purchase obligations amounting to approximately $320 million. In BMS' case, purchase obligations represent contracts or commitments for the purchase of raw materials, utilities, capital equipment and various other goods and services.

BMS is not dependent on any single supplier for its raw material such as polymer resins and films, paper, inks, adhesives, aluminum, and chemicals, as it purchases raw materials from a wide variety of global industry sources.

Although no single customer accounts for more than 10% of BMS' total sales, business arrangements with large customers require a large portion of the manufacturing capacity at a few individual manufacturing sites. This limits BMS' flexibility in dealing with changes in business demand.

Business Quality and Capital Allocation

BMS is the most diversified global player in the market, providing packaging for every aisle of the grocery store. It is also ranked in the top two for each of its key end use applications. In contrast, competitors lack comparable breadth and most of them are privately owned with a local or regional focus.

BMS' vertical integration provides a cost advantage. BMS has has 80 manufacturing facilities globally, including 73 manufacturing plants located in 18 states, the Commonwealth of Puerto Rico, and eleven non-U.S. countries for its flexible packaging segment, and seven manufacturing plants located in three states and two non-U.S. countries. More than 90% of sales are made by BMS's direct sales force, with sales offices and plants located throughout the world to provide prompt and economical service to more than 30,000 customers.

BMS possess patented unique polymer technologies for barrier films used for complex packages, whose solutions provide extended shelf life and consumer convenience features. In contrast, less complex packages are more susceptible to competition.

BMS has undertaken facility consolidation activities and cost reduction initiatives, which includes the closure of nine manufacturing locations, to optimize its asset base, improve operating efficiencies and generate cost savings. As of Sept. 30, 2012, four locations have been closed. The remaining consolidation activities are expected to be completed by the first quarter of 2013. The total estimated cost and cash paid for the program is $141 million and $94 million respectively. Upon completion, BMS expects this facility consolidation program to generate $50 million of cost savings every year.

BMS has paid dividends in every single year since 1995 with a current dividend yield of 2.97% and a dividend payout ratio of 67%. Dividends are paid quarterly.

Conclusion

BMS is too expensive at current valuations, I will pass for now.



Disclosure


The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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