You purchase a bottle of salad dressing. You unwrap the little plastic sheet at the head of the bottle, uncap the lid and out pours the dressing, which had been freshly and safely stored away in that little plastic bottle transported over thousands of miles of road, shipped on and off various trucks through various warehouses and stockrooms until finally it made its way into a store, and then into your refrigerator.
You enjoy the dressing on a nice crisp salad accompanied by an Oscar Mayer snack pack made of cheese slices, nuts and sliced meats packaged in an air tight zip bag. Afterward, you take a nice big gulp of a cold orange juice, packaged in one of the cartons with a small poke hole for a straw in the top.
So much packaging. But who makes it all? Virtually everything that is bought in store and is consumed, requires some form of packaging. Packaging is absolutely critical to both manufacturers and consumers to keep products fresh, conveniently located and safe. Companies that can provide superior and reliable packaging services are of major importance both up and down the value chain.
Bemis (BMS, Financial) is one of the biggest and best packaging companies out there and has a dominant position in the food, beverage, health care, chemicals and construction markets. Bemis' key packaging products include bags, wraps, containers and zip close products. These products are all custom designed to contain whatever goes into the packaging and are labeled based on the clients’ requirements.
The company has 60 packaging facilities located in 12 countries across the world and employs more than 18,000 employees. About 72% of revenues are generated from Canada and the U.S. South America and Mexico account for about 17% of revenues with sales to Europe, China and Australia accounting for about 11%.
In 2014 the company unloaded some of its underperforming assets related to pressure-sensitive materials and packaging for the printing, graphic design, paper packaging and technology markets. These divestures were made in an attempt to preserve capital for new innovations, boost margins, enhance efficiencies and support organic growth opportunities.
The company’s competitive advantage lies in superior technologies in polymer chemistry coating and laminating, its wide operating network, its favorable reputation, cost advantages derived from scale and modest switching costs. We don’t foresee its competitive advantage deteriorating anytime soon.
Financial highlights
Fiscal 2016 showed a 1.3% drop in earnings. U.S. packaging net sales of $2.6 billion for the full-year 2016 represented a decrease of 4.6% compared to the same period of 2015. Compared to the prior year, unit volumes were up nearly 1%. The decrease in net sales for the full year was driven by the contractual pass through of lower raw material costs as well as the mix of products sold.
That said, U.S. packaging operating profits increased to $400 million for the full year, representing a 15.3% net profit margin, increasing from $392 million, or 14.3%, in 2015. This margin increase primarily reflects continued operational improvements attributable to realized manufacturing efficiencies.
Global packaging net sales for full-year 2016 of $1.4 billion represent an increase of 4.5% compared to 2015. Excluding the impact of currency translation and acquisitions, net sales increased by 7.9% reflecting increased selling prices along with increased unit volumes of approximately 1%.
All considered, Bemis grew its earnings by 8% on a currency neutral basis in 2016, which is quite impressive for this type of business. Lower material input costs helped as well. Cash flow from operations for the year was $437 million, which was within the company’s original guidance targets. Bemis repurchased 3 million shares in 2016 with the board authorizing up to 20 million in additional purchases.
Moving forward, management expects adjusted diluted earnings per share to be in the range of $2.85 to $3.00 for full-year 2017. This guidance excludes approximately $8 million of previously announced pretax restructuring charges as well as any other unusual items that are unpredictable at this time.
Management expects full-year 2017 cash from operations to be in the range of $440 million to $480 million. Management also expects capital expenditures of approximately $200 million to support productivity and efficiency projects as well as growth projects. Dividends and share repurchases are also expected to continue over the period.
Purchase considerations
- Don’t get too excited; this is a boring company. That said, it is a strong player in an ever-growing market with near unlimited and recurring demand. Industries and consumers will forever need packaging!
- Bemis is one of the most innovative packaging companies. It is basically as far ahead as you can get on the innovation curve in this industry. And new and innovative food-packaging designs are becoming increasingly important to manufacturers as they look for new clever ways to differentiate their products on store shelves.
- The potential to package products previously left unpackaged is growing, and Bemis is well positioned to take advantage of this growth (new packaged prepared salads are a great example of something that wasn’t packaged before but is now in significant demand). Furthermore, look at the improvement in packaging designs over the last decade. Packaging, which was once a bare necessity that commanded very little respect in the value chain now represents one of the most important components.
- The company is well positioned internationally and is poised to take advantage of improved standards of living in South America and Asia.
- New product introductions in microwavable packaging and easy-open packages for seniors is progressing well.
- The company’s reorganization and divestitures of lower value-added product lines is improving margins as expected.
- Residual income remains positive, share repurchases are growing, and cash returns remain steady. This is a low volatility highly defensive company.
Valuation
At today’s levels, Bemis' stock trades at 20.6x trailing 12-month earnings per share of $2.48 and 17.2x fiscal 2017 estimated earnings per share of $2.90, both of which are reasonable compared to its five-year average price-earnings (P/E) multiple of 20.0x.
We project that Bemis will generate 10-year average per share sales, earnings, free cash flow and book value of $49.13, $3.01, $3.61 and $14.82. We also believe that Bemis' stock could consistently command fair value multiples of 0.9x, 19.0x, 13.0x and 2.3x sales, earnings, free cash flows and book value. Weighting sales, earnings, free cash flows and book value at 5%, 85%, 5% and 5%, we place Bemis' shares upward at $54.87, representing upside potential of about 10%, excluding dividends.
Bemis pays a dividend of $1.12 per share annually, which gives its stock a 2.2% yield. Investors must also note that it has raised its annual dividend payment for six consecutive years.
Risks
All valuation targets are subject to some form of uncertainty. As it relates to Bemis and Bemis’ earnings potential, it is exposed to a large degree to price volatility in food and energy prices in the general economy. When food prices rise, consumers tend to shift from premium products to less expensively packaged goods. When energy prices rise, both overhead costs and plastic resin prices rise. Plastic resins represent the key production input to Bemis' operations and price hikes can quickly squeeze margins if contracts are not properly hedged.
Conclusion
Overall, Bemis is a safe, steady and well-managed – but boring – company. Last year we predicted the stock price would move us at a reasonable clip, and it did in fact deliver, moving up about 17% (excluding dividends). It is important to find a good entry point on this stock. Investors insisting on a 25% margin of safety won’t find it here and might never find it with this company. Our target 10% margin of safety isn’t bad and following Thursday’s drop we’re seeing a bit of an opening. That said, Bemis is for the safe stable component of your portfolio, nothing more. Take a position if the margin of safety is sufficient. If not, you definitely want to keep this stock on your watchlist.
Disclosure: We do not currently hold any positions in Bemis.
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