It is a business Warren Buffett (Trades, Portfolio) should like: printing labels. Multi-Color Corp. (LABL, Financial) calls itself one of the world’s biggest label printing companies.
At its core, it is a simple business. But behind the simple business lies a world of technology and innovation. There are different kinds of labels for different types of containers, products and processes that deliver some marketing or functional requirement and vertical integration provides a full line of services to customers.
From an investment perspective, is it really a stock for fans of the Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) legends? Does it meet the four criteria the Buffett-Munger screener uses to separate bright prospects from the dismal? For example, after looking at this 10-year chart, is it fairly valued?
We will consider these and other issues that might matter to prospective investors.
History
According to FundingUniverse.com and the company's filing for 2016, the origins of the company go back to 1916. It planned to manufacture and sell a technological marvel of the day, the sheet-fed, three-color press. Within two years, though, the company had shifted its focus to printing paper labels.
In 1999, after suffering through a financially-troubled decade, the company hired a new chief executive officer, Francis D. Gerace, who cut costs, increased productivity, began making acquisitions and generally set the company on its current course. The acquisitions diversified the company within the label niche by getting Multi-Color into the pressure-sensitive and heat shrink markets. In addition, it continued serving the conventional label printing and in-mold markets.
Acquisitions played a big part in ongoing growth. Between April 2013 and January 2016, it made 13 significant purchases of other companies, most of them outside of the U.S.
Multi-Color’s business
According to the company's yearly filing with the SEC, several types of label printing make up the corporation’s business:
- Pressure-sensitive: As the name suggests, these are pressed onto bottles and other packaging. The company says, “The pressure sensitive market is the largest category of the overall label market and represents a significant growth opportunity.”
- In-Mold: This involves a process in which a label is applied to a plastic container as the container is being formed in the mold cavity. The value-add comes from the ability to provide security for consumer product companies and to display finely-detailed labels that help market products.
- Heat-transfer labels: These labels permanently adhere to the container and provide premium graphical capabilities such as fine vignettes, the frosted look and the no-label look.
- Glue-applied labels: A lower cost labeling solution, which can be upscaled using techniques such as foil stamping, embossing, metallic and unique varnish finishes.
- Shrink sleeve labels: Raw labels slide over glass or plastic bottles and are then heated to shrink to the shape of the container. Value-add comes from a 360-degree label and tamper-resistance. The company says demand in this category is growing and may broaden sales opportunities.
In addition to label printing, the company operates a graphics and pre-press service at each manufacturing location. With these services, Multi-Color can increase a customer’s speed to market and provide turn-key solutions.
While printing labels is a relatively old technology and business, all these lines are affected by new technology developments. In its pressure-sensitive segment, for example, the company says “Innovative features of this product include promotional neckbands, peel-away coupons, resealable labels, see-through window graphics and holographic foil enhancements to cold and hot foil stamping.” In fiscal 2016, it spent $5.52 million on research and development.
This slide from the November 2016 Investor Update summarizes Multi-Color’s business and shows some of its customers:
In 2016, Multi-Color had only one customer that accounted for more than 10% of revenue. The customer was Proctor & Gamble (PG, Financial), who was responsible for 17% of total sales.
It operates 44 plants and does business in 20 countries. According to the Investor Update, North America generates the most revenue, at 58% of the total.
Within its area of expertise, Multi-Color operates a diverse set of businesses which provide marketing appeal and functional value through labelling. Its main market is the U.S., but it also has growing international revenue.
Revenue
While the company operates through two segments, Consumer Product Goods and Wine & Spirits, financial reporting is aggregated into one reportable segment. There is a revenue breakout proxy in the middle section of this excerpt from an Investor Update slide:
As we see, pressure-sensitive accounts for 64%, or nearly two-thirds, of all revenue.
Overall, this 10-year chart shows how Multi-Color’s revenue has risen (with an estimate for fiscal 2017):
If EPS is any indication, revenue should continue to grow through the remainder of this year. In announcing the second-quarter fiscal 2017 results, Executive Chairman Nigel Vinecombe said, “The first half core EPS growth of nine cents or 5% year on year is in line with stated expectations and the second half comparisons are still expected to be easier.”
Multi-Color derives revenue from several segments, although most of it comes from pressure-sensitive labels. Revenue has grown steadily over the past decade and is expected do so again in this fiscal year.
Competition
While just about any company or individual can get into the printing business, getting a foothold in a niche such as label printing would undoubtedly be difficult. Still, Multi-Color says it faces a “large number of competitors” for the pressure sensitive and glue-applied markets, and “several competitors” in each of the in-mold, shrink sleeve and heat-transfer markets. It adds that competitiveness depends upon product performance, service, pricing, technical support and innovation.
Interestingly, it notes another important area of competitiveness: attracting executives. It says, “Competition for senior management personnel is intense.”
Hoover’s lists only two competitors, Outlook Group LLC and Fort Dearborn Co. An article at SeekingAlpha names Canadian company CCL Industries (TSX:CCL.B, Financial) as Multi-Color’s main competition in the label niche.
The company may have a solid and growing place in the niches it occupies, but other companies are ready to pounce if it drops the ball.
Moat
Morningstar assigns Multi-Color a narrow moat rating. Vuru gives it what might be called a very narrow moat:
The company owns or has applied for a number of patents. It says in its 10-K for 2017, “We believe that these patents, collectively, along with our ability to be a single source provider of many packaging needs, provide us with a competitive advantage over our competition.” At the same time, it argues the loss of any of those patents would not have a material adverse effect.
A narrow moat rating seems reasonable. Multi-Color’s sheer size, scope and geographic diversity do provide some assurance of future revenue and earnings. Similarly, the existing relationships built up with both customers and suppliers is an asset for the company.
Growth
Starting with the industry perspective, the label market is expected to grow at a 5% per year pace up to 2019. That is one of the positive messages in this slide from the Investor Update:
Also of interest in that slide is the reference to consolidation opportunities. Multi-Color has done very well with acquisitions; it notes that over the six years from 2010 to 2016, acquisition revenues have totalled $500 million. With the many acquisitions it has made, the company has an area of expertise that should allow it to grab both smaller competitors and market share.
On the investment side, the company has posted solid numbers as well:
Multi-Color is a growth-oriented company increasing its size and market share with both internal growth and strategic acquisitions.
Other
Multi-Color was incorporated in Ohio and is headquartered in Batavia, Ohio.
Executive Chairman of the Board Nigel Vinecombe was previously chief executive and chief operating officer. President, CEO and Director Vadis Rodato has held his position since 2016. Chief Financial Officer, Vice President and Secretary Sharon Birkett has been the CFO since 2010.
According to reuters.com,Ă‚ all three of these officers previously served in senior management positions at Collotype International Holdings Pty Ltd., an Australian company acquired by Multi-Color in 2008.
Ownership
Five of the investment gurus followed by GuruFocus have holdings; the largest among them belongs to Robert Karr (Trades, Portfolio) with 458,367 shares, good for a 2.71% stake in the company. The second and third-largest shareholders are Third Avenue Management (Trades, Portfolio) and Ken Fisher (Trades, Portfolio).
For a small-cap, Multi-Color has a substantial commitment from institutional investors:
Short interests are at a level that may be uncomfortable for some investors. At the same time, there is also a comparable holding by insiders.
With the exception of the short holdings (perhaps not unusual for a small cap), the ownership profile raises no concerns.
By the numbers
Multi-Color has a current share price that is just 2% below its 52-week high, a price-earnings (P/E) ratio in the mid-20s, a ROE in the mid-teens, a very small dividend (and payout ratio) and added 180,000 shares to its capitalization in 2016.
Financial strength
Multi-Color receives a mediocre 5 out of 10 for financial strength and a strong 8 out 10 for growth and profitability:
Red bars on the first three metrics draw attention to the company's long-term debt, which is shown in this 10-year chart:
Chip Rewey and Tim Bui of the Third Avenue Small-Cap Value Fund say of the company’s debt, “...Multi-Color has manageable debt. Our companies must have the wherewithal to weather economic cyclicality as well as the ability to take advantage of opportunities within their industry.”
EBITDA has grown along with the debt:
This 10-year chart with an estimate for fiscal 2017 shows EPS climbing as well:
GuruFocus notes Multi-Color's operating margin is expanding and that it is outperforming a majority of its peers, "NAS:LABL's Operating Margin is ranked higher than 68% of the 743 Companies in the Global Business Services industry. ( Industry Median: 5.91 vs. NAS:LABL: 11.04 )."
GuruFocus finds its net margin has had better days, "NAS:LABL's Net Margin Range Over the Past 10 Years Min: 3.86 Max: 10.93 Current: 5.55". As this GuruFocus table shows however, the 10.93% net margin is an outlier from 2008. Otherwise, 5.5% is about average for Multi-Color:
Rewey and Bui say, “... Multi-Color has compounded value over time through both increasing margins and expanding into new markets. . . . The outlook for compounding should exist for many years, spurred by world-wide growth of consumer products.”
Like many other companies, Multi-Color apparently decided to use debt as it became clear after the 2008 financial crisis that interest rates were holding at historic lows. It has used that inexpensive capital to grow both its top and bottom lines.
Valuations
Multi-Color receives a 4 out of 5-Star rating for Predictability, meaning it is above average in its ability to consistently increase its earnings.
The Discounted Cash Flow value calculator comes in with a valuation well below the current price (closing at $78.15 on Jan. 19):
Multi-Color’s P/E is not as high as it has been in the past, but still in the high end of the range it has established over the past 10 years:
The PEG ratio, at 1.62, is in the middle of fair value range (undervalued is below 1.0, fair is 1.0 to 2.0 and overvalued is above 2.0). It is also in the middle of the range it set over the past five years:
The Wall Street analysts followed by Nasdaq.com have a 12-month consensus price of $80, which is just 2.4% above its current price. As for buying and selling, they are almost evenly split among buy, sell and hold:
Overall, the information and data suggest the company is fairly or slightly overvalued at its current price. Certainly, there are no suggestions that this stock might be underpriced.
Conclusions
The Buffett-Munger screener looks for high-quality businesses at undervalued or fair value prices using four criteria:
- High predictability rank
- Competitive advantages, or a moat, that allow them to protect their margins
- Little or no debt
- Fairly valued or undervalued based on PEPG or PEG
Multi-Color Corp. meets all these criteria, although in two cases it is a close call: the moat is narrow and the debt level may be debatable. On valuation, it does fit based on the PEG ratio, but otherwise might be considered a bit expensive. With 4-Star Predictability, it does meet the first criterion comfortably.
This stock is unlikely to get much attention from value investors looking for underpriced properties, nor by those who avoid debt. Income investors will not find enough yield.
It does deserve shortlisting by growth investors looking for a small cap that dominates its niche.
Disclosure: I do not own shares in any of the companies listed here, and I do not expect to buy any in the next 72 hours.
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