Bemis Company Inc. -- Waiting For A Better Entry On This Boring Play
Company Overview
Bemis Company Inc. (BMS, Financial) is a leading global manufacturer of packaging products and pressure sensitive materials. Its operations are organized around three reportable business segments: U.S. packaging (accounting for 59% of 2013 revenues); global packaging (accounting for 30% of 2013 revenues); and pressure sensitive materials (accounting for 11% of 2013 revenues). U.S. and global packaging products consist primarily of polymer, blown, and cast film bags, wraps, and containers for packaging food and personal care products as well as some non-food products. Customers of these products typically manufacture and market fresh meats, liquids, frozen foods, cereals, snacks, cheeses, coffees, condiments, candies, pet foods, baked goods, seeds, lawn and garden products, tissues, fresh produce, personal care and hygiene products, disposable diapers, agribusiness products, and minerals. BMS' pressure sensitive products consist primarily of adhesive coated papers and film substrates sold to consumers in the label, graphic design, and technical products industries, including pressure sensitive films used for decorative signage and photographic overlaminate.
The company employs approximately 19,100 individuals and has 72 manufacturing facilities. It manufactures and sells its products throughout North America, Latin America, Europe, and Asia-Pacific. BMS' primary customers are in the food industry, which accounted for approximately 68% of net sales in 2013. The firm has a well diversified product base with its packages used on products in virtually every grocery store in North America. No single customer accounts for 10% or more of the company's total sales.
The major markets in which it sells its products are highly competitive. Firms compete heavily on price, pre- and post-purchase services, innovation, and quality. This competition is intense as both the size and the number of competing firms in its markets are large. To name just a few, major competitors include Amcor Limited, Berry Plastics Corporation, Bryce Corporation, Coveris High Performance Packaging, and Winpak ltd.
BMS sells its products through a variety of distribution channels, more than 90% of which are made by the company's direct sales force. It has sales offices and plants located in North America, Latin America, Europe, and Asia-Pacific and has an existing customer base of about 30,000 customers through which BMS generated over $5 billion in revenues in 2013.
Purchase Considerations and Reasons for Caution
What we like about BMS is that, while an extremely boring firm, there is perpetual demand for its products, and we don't think that this is going to change any time soon. We also like that the need for higher quality food packaging products is positively correlated with economic progress--such that continued growth in emerging markets should help fuel sales for the foreseeable future. We also like BMS' innovation activities in zip-close, microwaveable, and easy-open packaging products in the senior, healthcare and pharmaceutical industries. We also like that the company's financials are reasonably strong, the short percentage of the company's float is only about 4%, and the company's Beta is 0.63.
What we don't like about BMS is the fact that it sells a near commodity-type product and faces intense competition for many larger and smaller scale players. We also don't like BMS's sensitivity to commodity and energy price cycles. Polymer resins and films, paper, inks, adhesives, aluminum, and chemicals constitute the basic major raw materials used by BMS and as prices go up, BMS' earnings go down.
Recent Financial HIghlights
This year (2014) has so far been a pretty flat year for BMS with Q1-Q3 revenues droping by about 2.6% versus the same period last year, which in the end was a great year for the company's sales. Earnings have been more significantly squeezed (down by 15.6% over the same period) due primarily to higher labour costs on newly negotiated union contracts. Minor share repurchase activities has provided some offset to EPS figures, but we stress the impact has been minor. Divestures and the closure of less efficient operating facilities are expected to provide some margin support--which on the operating and bottom line have been in a long downward trend. Declining energy and plastic resin prices will also help. The market is projecting EPS of $2.32 for 2014 and $2.47 for 2015. Dividends are expected to grow by about 3% in 2015.
Valuation
A company’s fair value estimate can be calculated as the present value of expected future free cash-flows to equity. Free cash-flows to equity represent the amount of cash-flows available to common stockholders after all operating expenses, interest and principal payments to lenders have been paid and necessary investments in capital equipment and working capital have been made to maintain and grow operations.
Here we estimate fair value in 5 steps:
we forecast the firm’s free-cash flows to equity for the next 10 years using econometric processes;
we discount those cash-flows to the present;
calculate a terminal value for the firm 10 years out based on a long-term expected growth rate and terminal discount rate and discount it to the present;
add the discounted terminal value to the discounted value of free-cash flows to equity over the next 10 years; and
divide the present value of all cash-flows by the diluted number of shares outstanding.
Table 1 presents our free-cash flow estimates. Table 2 presents valuation inputs and results.
Table 1: Free Cash-Flow to Equity Projections
| Historical Year End | Projected Year End | ||||||||||||
| Dec11 | Dec12 | Dec13 | Dec14 | Dec15 | Dec16 | Dec17 | Dec18 | Dec19 | Dec20 | Dec21 | Dec22 | Dec23 | |
| Total Revenue | 5323 | 5139 | 5030 | 5287 | 5480 | 5669 | 5843 | 6003 | 6153 | 6307 | 6496 | 6626 | 6758 |
| -COGS | 4412 | 4192 | 4058 | 4293 | 4447 | 4601 | 4742 | 4872 | 4993 | 5118 | 5272 | 5377 | 5485 |
| Gross Profit | 910 | 948 | 972 | 994 | 1033 | 1068 | 1101 | 1131 | 1160 | 1189 | 1224 | 1249 | 1274 |
| Margin % | 17.1% | 18.4% | 19.3% | 18.8% | 18.8% | 18.8% | 18.8% | 18.8% | 18.8% | 18.8% | 18.8% | 18.8% | 18.8% |
| -Operating Expense | 543 | 602 | 592 | 571 | 649 | 672 | 692 | 711 | 760 | 779 | 802 | 818 | 834 |
| EBIT | 367 | 346 | 381 | 423 | 384 | 397 | 409 | 420 | 400 | 410 | 422 | 431 | 439 |
| Income Before Tax | 292 | 279 | 320 | 349 | 307 | 317 | 327 | 336 | 314 | 322 | 331 | 338 | 345 |
| Net Inc./Starting Line | 187 | 174 | 213 | 244 | 215 | 222 | 229 | 235 | 220 | 225 | 232 | 237 | 241 |
| Free Cash Flow to Equity | |||||||||||||
| +Dep & Amort | 220 | 204 | 190 | 216 | 233 | 241 | 249 | 255 | 262 | 268 | 276 | 282 | 288 |
| % of revenue | 4.1% | 4.0% | 3.8% | 4.1% | 4.3% | 4.3% | 4.3% | 4.3% | 4.3% | 4.3% | 4.3% | 4.3% | 4.3% |
| +Deferred taxes | 24 | 9 | 2 | 6 | 12 | 13 | 13 | 14 | 14 | 14 | 15 | 15 | 15 |
| % of revenue | 0.4% | 0.2% | 0.0% | 0.1% | 0.2% | 0.2% | 0.2% | 0.2% | 0.2% | 0.2% | 0.2% | 0.2% | 0.2% |
| +Other non-cash | 276 | -102 | -93 | -80 | 49 | 286 | 17 | 7 | 3 | 11 | 4 | 7 | 8 |
| % of revenue | 5.2% | -2.0% | -1.9% | -1.5% | 0.9% | 5.0% | 0.3% | 0.1% | 0.1% | 0.2% | 0.1% | 0.1% | 0.1% |
| -WC investments | -65 | -21 | -28 | -16 | -23 | -24 | -25 | -25 | -26 | -26 | -27 | -28 | -28 |
| % of revenue | -1.2% | -0.4% | -0.6% | -0.3% | -0.4% | -0.4% | -0.4% | -0.4% | -0.4% | -0.4% | -0.4% | -0.4% | -0.4% |
| -Cap expenditures | -135 | -136 | -140 | -211 | -219 | -227 | -234 | -240 | -246 | -252 | -260 | -265 | -270 |
| % of revenue | -2.5% | -2.7% | -2.8% | -4.0% | -4.0% | -4.0% | -4.0% | -4.0% | -4.0% | -4.0% | -4.0% | -4.0% | -4.0% |
| +Net borrowings | 276 | -157 | 13 | 32 | 33 | 35 | 36 | 37 | 38 | 38 | 40 | 40 | 41 |
| % of revenue | 5.2% | -3.1% | 0.3% | 0.6% | 0.6% | 0.6% | 0.6% | 0.6% | 0.6% | 0.6% | 0.6% | 0.6% | 0.6% |
| FCF-to-Equity | 562 | 128 | 247 | 304 | 280 | 289 | 298 | 306 | 292 | 300 | 309 | 315 | 321 |
Table 2: Valuation Inputs and Results
| Long-term growth rate | 2.0% |
| Terminal discount rate | 9.0% |
| Terminal value ($M) | 4681 |
| Discounted terminal value ($M) | 1977 |
| Discounted FCFE (t1-t10) ($M) | 2059 |
| Cash ($M) | 142 |
| Diluted weighted average shares (M) | 104 |
| Fair value | 40.21 |
| Market price | 40.60 |
| Margin-of-safety (%) | -1.0% |
We also find it useful to compare our projections with those that would be generated based on a pure Monte Carlo Simulation. This involves the forward simulation of all items of the firm's historial financial statements based on the assumptions that line items will move forward (1) in a mean reverting fashion or (2) on a preserved trend. Results from the Monte Carlo simulation are presented in Figure 1.
Figure 1: Company Valuation based on a pure Monte Carlo Simulation
The price target generated based on the Monte Carlo simulation is $62.23, which is considerably higher than our actual estimate of $40.21. Perhaps what's more interesting though is that the probability of making money on BMS over the next 10 years based on a pure Monte Carlo simulation is about 69%.
Conclusion
BMS’s per share earnings in 2013 were $2.04. Historical earnings per share grew at an annual rate of approximately 2% per year since 2004. BMS’s sales per share in 2013 were $48.41. We project that sales will grow at a declining rate between 2014 and 2023. We expect fairly stable gross but slightly declining net margins. Interest expenses and capital expenditures will remain at recent historical levels in the amounts of approximately 2% and 4% of sales respectively. Our fair value estimate of BMS equals $40.21 (this is significantly below our pure Monte Carlo Simulation estimate of $62.23). At a current price of $40.60, this suggest that BMS is overpriced by about 1%. That being said, while we don't think BMS is a buying opportunity now, it's definitely worth keeping on your radar screen
