Recently a Member of Pat McKeough’s Inner Circle asked for his recommendation on a Canadian stock that gets most of its revenue from other countries.
CCL Industries gets 40% of its revenue from the United States, with another 50% coming from Europe and Asia. The packaging and labels company pursues a growth-by-acquisition strategy, and spent over $55 million on acquisitions in the first six months of 2018. Revenues have risen steadily for this stock, and it raised its dividend in 2018. The company should continue to grow, says Pat, but it faces risk with its exposure to cyclical commodity prices and currency fluctuations. That aggressive growth-by-acquisition strategy also adds risk.
Q: Pat, can I have your recommendation on CCL Industries? Thanks.
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A: CCL INDUSTRIES INC. (symbol CCL.B on Toronto; www.cclind.com) mainly makes packaging products for the food, health-care, automotive and personal-care industries. Procter & Gamble and Johnson & Johnson are among its major customers. CCL also makes radio frequency identification (RFID) tags and banknotes.
The company has four main businesses:
CCL (64% of total revenue) makes pressure-sensitive labels for plastic bottles and other forms of packaging. This division also makes aluminum aerosol cans, beverage bottles and flexible plastic tubes.
Avery (15%) makes labels, binders, dividers, sheet protectors and writing instruments.
Checkpoint Systems (14%) makes RFID tags. Those products help retailers prevent theft and manage their inventories.
Innovia (7%) makes polymer banknotes for central banks.
The U.S. supplies 40% of the company’s revenue, followed by Europe (34%), Asia (17%), Mexico, Brazil, Chile and Argentina (6%), and Canada (3%).
The company has a long history of expanding through acquisitions. Notably, in July 2013, it paid $486.7 million U.S. for the office and consumer products division of Avery Dennison Corp., symbol AVY on New York.
As well, in February 2017, CCL completed its biggest purchase to date, paying $1.15 billion for Innovia Group. That firm makes polymer banknotes for 25 central banks, including those in Canada, the U.K. and Australia. These bills are more durable and harder to counterfeit than paper notes. The ongoing shift to cashless online and mobile transactions could hurt Innovia’s long-term prospects, although more countries around the world are likely to shift from paper to plastic bank notes.
Growth stocks: Stock trading at high multiple of projected 2018 earnings
New acquisitions such as Avery helped CCL’s revenue jump 263.3%, from $1.31 billion in 2012 to $4.76 billion in 2017. Over that period, earnings soared 386.3%, from $97.5 million, or $0.58 a share, to $474.1 million, or $2.69 (all per-share amounts adjusted for a 5-for-1 stock split in June 2017).
In the first six months of 2018, CCL spent $55.3 million on acquisitions. The biggest of those was its $9.3 million purchase of Fascia Graphics Inc. Based in the U.K., the firm makes graphic overlays and membrane keypads for electronic products.
In the quarter ended June 30, 2018, CCL’s revenue rose 0.9% to $1.26 billion from $1.25 billion a year earlier. Contributions from acquisitions increased sales by 1.0%, while higher demand from its existing businesses added 1.3%. However, unfavourable foreign exchange rates cut overall sales by 1.4%.
Earnings in the quarter rose 10.2%, to $121.1 million from $109.9 million. Due to more shares outstanding, per-share earnings rose at a slower rate of $0.68 from $0.63. If you disregard costs to absorb its new businesses and other unusual items, earnings per share gained 2.9%, to $0.70 from $0.68.
The company ended the quarter with cash of $822.4 million. At that time, its long-term debt was $2.3 billion, or a reasonable 22% of its market cap. Due to its many acquisitions, CCL’s goodwill and intangible assets totalled a high $2.7 billion, or 26% of the company’s market cap.
In July, CCL completed its purchase of Treofan. It makes biaxially oriented polypropylene (BOPP) film for U.S. and Mexican food and beverage packaging plants. CCL paid $255.0 million for Treofan. It also expects to pay $33.0 million to complete the expansion of its Mexican plant.
The stock trades at 23.9 times the $2.90 a share that CCL will probably earn in 2018. The company raised its quarterly dividend by 13.0% with the March 2018 payment to $0.13 from $0.115. The annual rate of $0.52 yields 0.9%.
CCL’s exposure to volatile commodity prices—including those for oil and aluminum—creates risk. Fluctuating currencies and its aggressive growth-by-acquisition strategy add to that risk. However, the company should be able to keep using its size, scale and investments in new technology to build market share.
Inner Circle recommendation: CCL Industries is okay to hold.
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