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Amcor (AMCR) Bets on Solid Demand & Innovation Amid Cost Woes

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Amcor plc (AMCR - Free Report) is well-poised to gain on the ongoing strong demand across its end markets. Its strategy of investing in growing its presence in high growth segments, emerging markets and on product innovation will fuel growth. Growing consumer awareness and the consequent increase in demand for sustainable packaged products represents a major growth opportunity for the company.

Solid Demand To Fuel FY22 Earnings Despite High Costs

Amcor’s sales have been benefiting from the stay-at-home trend amid the pandemic. Over the past few quarters, the Flexibles segment has witnessed solid growth across a broad range of end markets, including higher-value end markets like protein, coffee, cheese and pet food. The Rigid packaging segment is also seeing strong consumer demand.

The demand reflects higher-at-home consumption of packaged beverages courtesy of higher retail sales in multi-pack formats across a range of product categories. Brand extensions and the introduction of new health and wellness oriented products in PET containers  have been a significant contributor. Specialty container volumes are gaining in certain categories including spirits, personal care and home cleaning. This scenario is expected to continue in fiscal 2022 as well.

Amcor is likely to face supply disruption and raw material price volatility, and higher labor and transportation costs. Nevertheless, higher demand in its markets will help offset these headwinds. The company expects adjusted constant currency earnings per share growth of approximately 7-11% in fiscal 2021, which indicates earnings per share in the range of 79 cents to 81 cents.

Solid Investment Strategy to Bear Fruit

Backed by its strong balance sheet and annual free cash flow in excess of $1 billion, Amcor continues to invest in expanding capacity in higher-growth segments like healthcare, protein and premium coffee or hot fill beverage containers and barrier films. Given the scope of growth in emerging markets, the company has over $3 billion in annual sales from 27 profitable emerging market businesses.

To meet ever-evolving consumer needs and to stay ahead of the curve, the company continues to bring innovative products. It is building two new state-of-the-art innovation centers at Ghent, Belgium, and Jiangyin, China that will complement existing innovation centers in North America.

Driven by increasing e-commerce activities over the past few years, packaging has gained importance as it maintains the integrity and durability of a product during the complex delivery process. The pandemic has only reasserted the value of packaging in ensuring hygiene and sterilization, and extending shelf life. Consumers’ increasing demand for more sustainable packaged products represents a major growth opportunity. Amcor has doubled the use of post-consumer recycled resin in the last two years. Amcor is the first packaging company to have pledged to develop all its packaging to be recyclable or reusable by 2025.

Bemis Buyout to Generate Synergies

Amcor’s acquisition of Bemis Company in 2019 expanded its global footprint and opened up new attractive end markets and customers. In fiscal 2021, the company realized cost synergies of approximately $75 million  expects total cost synergies in fiscal 2022 to be at least 10% higher than its original target of $180 million. The buyout is expected to lead to more than 200 basis point expansion in the Flexible segment’s margins in fiscal 2022 compared to fiscal 2019 levels. Taking into account the gains from the buyout, earnings per share in fiscal 2022 is expected to be more than 35% of fiscal 2019 levels.

Price Performance

Amcor’s shares have declined 1.6% over the past year, compared with the industry's growth of 9.4%.

Zacks Investment ResearchImage Source: Zacks Investment Research

Zacks Rank & Stocks to Consider

Amcor currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are A. O. Smith Corporation (AOS - Free Report) , ScanSource, Inc. (SCSC - Free Report) and SiteOne Landscape Supply (SITE - Free Report) . All of these stocks carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A. O. Smith has an expected earnings growth rate of around 35% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised upward by 1% in the past 30 days.

A. O. Smith’s shares have surged 45% in the past year. The company has a trailing four-quarter earnings surprise of 16.8%, on average.

ScanSource has a projected earnings growth rate of around 19% for 2021. The Zacks Consensus Estimate for current-year earnings has been revised upward by 1% in the past 30 days.

The company’s shares have appreciated 16% in a year. ScanSource has a trailing four-quarter earnings surprise of 34.6%, on average.

SiteOne Landscape has an estimated earnings growth rate of around 77.2% for the current year. In the past 30 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 14%.

The company’s shares have increased 80% in the past year. SiteOne Landscape has a trailing four-quarter earnings surprise of 130.9%, on average.