Recently a Member of Pat McKeough’s Inner Circle asked for his analysis on a Canadian packaging company with a diverse international clientele.
CCL Industries gets 40% of its revenue from the U.S., with Europe and Asia supplying another 50%. The company grows by acquisition, having made nine since the beginning of 2016 alone. CCL’s revenues have grown steadily and it recently raised its dividend. Still, says Pat, the company incurs risk with the effect of volatile commodity prices on its material costs, its growth-by-acquisition strategy, and currency fluctuations.
Q: Good day, Pat and TSI team. Could you please give me your analysis and recommendation for CCL.B on the TSX? Thanks very much!
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A: CCL INDUSTRIES INC. (symbol CCL.B on Toronto; www.cclind.com) primarily 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.
On June 5, 2017, the company split its shares on a five-for-one basis.
It has five main divisions:
Label (59% of total revenue) makes pressure-sensitive labels for plastic bottles and other forms of packaging.
Avery (16%) 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.
Containers (4%) makes aluminum aerosol cans, beverage bottles and flexible plastic tubes.
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.
Growth stocks: Earnings per share gain 40% in latest quarter
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.
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 (adjusted for the 5-for-1 split).
As a result, revenue rose 16.6% in the three months ended December 31, 2017, to $1.23 billion from $1.1 billion a year earlier. Earnings per share gained 40.8%, to $0.83 from $0.59. That increase came from the higher revenue as well as increased sales of higher-profit-margin products.
The company ended the quarter with cash of $557.6 million. At that time, its long-term debt was $2.1 billion, or a reasonable 18% of its market cap. Due to its many acquisitions, its goodwill and intangible assets totalled a high $2.7 billion, or 23% of its market cap.
The stock trades at 21.8 times the $2.90 a share that CCL will probably earn in 2018. The company is raising its quarterly dividend by 13.0% with the March 2018 payment to $0.13 from $0.115. The shares now yield 0.8%.
CCL’s exposure to volatile commodity prices—including those for oil and aluminum—creates risk. Fluctuating currencies and CCL’s aggressive growth-by-acquisition strategy add to it. Since the beginning of 2016 alone, the company has made nine acquisitions. However, it should be able to keep using its size, scale and technology to build market share.
Inner Circle recommendation: CCL Industries is okay to hold.
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