Amcor's neat package
Recommendation
In that time there have been many ups and downs for this global paper and packaging manufacturer. But if you invested in the company rather than traded the stock, you've done well.
Overdone
That's why, when the share price fell by 14% between issue 86/Aug 01 (Long Term Buy - $6.82) and issue 88/Sep 01 (Long Term Buy - $5.89) we said that 'this fall should look overdone in the long-term'. Well, it didn't take long.
Last month Amcor posted its half-year results. Judging by the 12% gain since issue 94/Dec 01 (Long Term Buy - $7.05), the market likes what it sees. The $3.7bn sales figure reveals a global spread that humbles this company's beginnings. Australasia, North America and Europe all contributed about a third of this figure with Asia chipping in 4% of the total.
When it comes to diversification across countries and currencies, Rio Tinto is a very learned role model. Amcor is employing a similar strategy that's so far proving successful.
After pulling off a three-way European merger in April last year in flexible packaging (corrugated boxes and cartons, paper linings, sacks, industrial and food wrappings etc), Amcor came out with 67% ownership and a 15% market share.
That gives it some pricing power. The man responsible for this shake-up in focus and offshore push is MD Russell Jones. He believes a 20% share of the European market isn't so far away.
North American earnings increased 29% thanks mostly to PET (a high-tech plastic bottling substitute) operations, where Amcor recently spent $12m on Pet Pak of Canada.
Consolidation
Further global consolidation in the flexibles business is quite likely, with Amcor playing a key role, as the latest UK acquisition attests. Still, we'd suggest the key to the company's future growth comes from its PET innovations.
In flexibles, as they're known, Amcor plans to increase margins by lifting market share. If it achieves its targeted 15% return on funds employed we'd expect niche competitors to start nipping away at that figure.
The same cannot be said of PET production. Amcor is committed to ongoing research and development to allow it to grow market share at sustainable higher margins. Such products are not so easily copied.
What of the company's production profile? With 61% in food and beverage, 22% in industrial, 9% consumer goods and 8% in tobacco, it has defensive and growth characteristics.
And, with inefficient plants being closed in Europe and lower head counts, the market is very optimistic.
Which brings us to price. With enthusiasm for Jones' efforts pushing the stock towards $8, we've increased our share price risk. With the yield shrinking by the day - currently 3.55% – any stumble will be duly punished.
That, though, does not dishearten us. The benefits of merging and consolidating operations in Europe are yet to have their full effect and Jones' strategy has some way to go before he achieves the group's full potential.
Provided he isn't seduced into paying more for those acquisitions to deliver on his strategy, Amcor should grow stronger. LONG TERM BUY.