Bemis Remains Neutral - Analyst Blog
December 23 2013 - 5:25PM
Zacks
On Dec 19, we maintained our Neutral recommendation on
Bemis Company Inc. (BMS) 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),
Sealed Air Corporation (SEE) and UFP
Technologies, Inc. (UFPT). While Packaging Corporation and
Sealed Air holds a Zacks Rank #1 (Strong Buy), UFP Technologies
carry a Zacks Rank #2 (Buy).
BEMIS (BMS): Free Stock Analysis Report
PACKAGING CORP (PKG): Free Stock Analysis Report
SEALED AIR CORP (SEE): Free Stock Analysis Report
UFP TECH INC (UFPT): Free Stock Analysis Report
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