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Bemis Banks on Agility Plan, Expenses Continue to Mount

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On May 10, we issued an updated research report on Bemis Company, Inc. (BMS - Free Report) . The company is poised to gain from tax reform, its initiatives to improve cost structure through the Agility plan as well as focus on restructuring activities. However, raw material inflation, rising expenses and a challenging economic environment in Brazil are expected to mar its performance in the near future.

Let’s illustrate the factors.

Agility Plan to Drive Growth

To fix, strengthen and grow its business, Bemis rolled out an improvement plan — Agility — in 2017. The plan includes optimizing manufacturing capacity, consolidating office space and reducing SG&A and other costs. It also involves the simplification of product portfolio and organizational structure, rebalancing R&D efforts and pursuing targeted areas of growth in the North American business.

Per the plan’s targeted pretax annual savings of $65 million, $4.1 million has been realized in 2017. The company raked in total savings of around $8 million in first-quarter 2018. In 2018, Bemis expects to realize roughly $35 million of benefits.

Tax Reform to Boost Earnings

Bemis reaffirmed its earnings per share outlook at $2.75-$2.90 for 2018, which includes 31 cents of benefit from the tax reform at the mid-point of the range. The company expects the effective tax rate for the full year to be 24%.

Restructuring Activities on Track

During second-quarter 2017, Bemis started adopting restructuring measures to improve efficiency and drive profits through the closure of a few manufacturing facilities, consolidation of office space and retrenchment of some administrative positions. The restructuring plan is expected to be completed by the end of 2019, leading to annual pre-tax savings of $65 million.

Raw Material Inflation to Hurt Margins

Bemis expects to witness material price inflation of 2-3% globally as well as the impact of exceeding annual pay for performance targets in 2018. In Latin America, specifically, the company will experience a raw material headwind due to the current economic environment, which has made passing the increased input costs to customers more challenging. This will impact its margin performance.

Escalating Expenses to Mar Profit

Bemis anticipates that its selling, general and administrative expenses will flare up year over year in 2018. It also estimated total restructuring and other plan-related cash payments related to the 2017 restructuring plan to be around $75-$85 million. Bemis will also face interest expense on revolving credit facility.

Brazil a Weak Spot

In Latin America, Bemis expects volumes to remain relatively flat in 2018 as compared to 2017 as the economic environment has not yet recovered as much as anticipated.

Share Price Performance

Bemis has underperformed its industry with respect to price over the past year. The stock has lost around 3%, while the industry has recorded growth of 4%.

Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the same sector are Axon Enterprise, Inc (AAXN - Free Report) , Caterpillar Inc. (CAT - Free Report) and Terex Corporation (TEX - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Axon Enterprise has a long-term earnings growth rate of 25%. Its shares have appreciated 113%, over the past year.

Caterpillar has a long-term earnings growth rate of 13.3%. The company’s shares have been up 52% over a year.

Terex has a long-term earnings growth rate of 20.2%. The stock has gained 25% in a year’s time.

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