LIVEWIRE | JASON TEH
While the Australian share market contains numerous companies that pass the first three filters, finding a stock with a sensible price tag has become increasingly challenging. However, Amcor passes all four of Buffet’s filters:
Amcor is relatively straightforward business, supplying packaging and containers globally for defensive end markets such as food and beverage, pet food, pharmaceutical, tobacco, and home and personal care.
Favourable long-term economics
While packaging demand exhibits defensive growth characteristics, industry profitability can be severely impacted by competitor behaviour. Prior to 2009, Amcor operated in markets where there was overcapacity and bouts of irrational discounting by competitors.
Amcor’s acquisition of Alcan’s packaging division in 2009, consolidated the industry, which led to more resilient profits. Since then, Amcor has used its strong, defensive cash flow to pay a healthy dividend and reinvest in the business. Any excess cash flow has been used to either acquire businesses or buyback stock.
Able and trustworthy management
Ken MacKenzie (former CEO) transformed Amcor into a resilient and high returning business. His successor, Ron Delia was appointed as CEO in 2015. Ron was groomed by Ken to continue the ‘Amcor way’.
Amcor’s recent announcement to acquire Bemis has rattled the market, raising questions over its acquisition discipline. While we don’t necessarily like companies lowering their return hurdles for acquisitions, it is somewhat offset by the acquisition being funded with 100% equity. Importantly, from an investment point of view, Amcor’s share price is well below its preannouncement price.
The uncertainty has created an outstanding buying opportunity. Amcor’s PE multiple is now close to its 5-year lows, yet the acquisition makes its outlook stronger. Specifically, earnings growth is greater and the balance sheet will rapidly de-gear when the businesses are merged.
Read the full Livewire Exclusive article here.