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On Dec 19, we maintained our Neutral recommendation on Bemis Company Inc. (BMS - Analyst Report) based on expected benefits from its cost reduction program, acquisitions, significant and consistent free cash flow and focus on growth initiatives.

However, weak volume, a cautious consumer spending environment, weaker Brazilian currency and the sluggish European economic outlook continue to be the major concerns for this global manufacturer of flexible packaging products and pressure sensitive materials.

Why Reiterated?

Bemis Company’s third-quarter EPS remained flat at 60 cents, but net sales declined 2.3% year over year to $1.26 billion. Management expects adjusted EPS in the range of 50 cents to 56 cents for the fourth quarter of 2013 and between $2.24 and $2.30 for 2013.

In the fourth quarter of 2011, Bemis had embarked on an aggressive cost reduction program by reducing headcount, closing nine facilities and moving the production to other facilities. On completion, this facility consolidation program is expected to save annual costs of approximately $50 million. Savings from these restructuring efforts in the form of reduced fixed costs, increased asset utilization and an improved product mix should help mitigate the weakness in volumes and raw material cost inflation.

Bemis has successfully grown through acquisitions. In 2011, the company acquired Mayor Packaging in China, which gave the company a high-barrier footprint focused on the growing food packaging market in the region. Recently, Bemis continued its expansion efforts in the region with the acquisition of Chinese manufacturer of specialty films Foshan New Changsheng. With flexible packaging demand slowing in North America, expansion in emerging markets is a good option.

Bemis generates significant and consistent free cash flow, which puts it in a position to pay a sizeable and increasing dividend. In Feb 2013, the board of directors approved the 30th consecutive annual increase in the quarterly cash dividend on common stock to 26 cents per share, a 4% increase. In addition, during the first nine months of 2013, Bemis repurchased 1 million shares for $36 million.

As of Sep 30, 2013, Bemis had authorization to repurchase about another 3.5 million shares. The restructuring initiatives will also help in generating significant cash flow going forward. We expect Bemis to repurchase shares opportunistically during 2013 given that its net debt to adjusted EBITDA at the end of the third quarter was 2.1x, close to its target rate of 2.0x.

On the flipside, Bemis tightened its fiscal 2013 guidance for adjusted earnings per share in the range of $2.24 to $2.30 from the previous guidance of $2.30 to $2.40 per share. The lowered guidance reflects a weaker Brazilian currency and increased costs associated with mechanical and electrical issues encountered during the transition of production equipment from plants that were closed as part of the facility consolidation. Furthermore, it also reflects lower unit volumes as management did not see the expected volume improvement in the second half of 2013.

Economic conditions are negatively impacting volumes as consumers cut back on their spending. Furthermore, Bemis derives approximately 11% of its business from Europe. In the first nine months of fiscal 2013, sales of Pressure Sensitive Materials segments were down 0.8% year over year dragged down by lower sales for value-added graphic products from the European operations. There will not be any dramatic improvement in operating profit until the European economy begins to strengthen and demand for value-added graphic products improves.

Other Stocks to Consider

Better stocks worth considering in the sector include Packaging Corporation of America (PKG - Snapshot Report), Sealed Air Corporation (SEE - Analyst Report) and UFP Technologies, Inc. (UFPT - Snapshot Report). While Packaging Corporation and Sealed Air holds a Zacks Rank #1 (Strong Buy), UFP Technologies carry a Zacks Rank #2 (Buy).

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