The world’s largest packaging company, Amcor (ASX: AMC), has outperformed the S&P/ASX 200 (ASX: XJO) by 10% over the past 12 months, reaching an all-time high of $10.32 in late May. While factors such as the rotation to defensive, high-yielding stocks could be contributing to the stellar performance, it’s the immensely successful business model of Amcor which has delivered strong gains with minimal volatility. The past 12 months has seen only one drop of greater than 10% for Amcor, and the recent 10% pull back in the Australian share market has seen Amcor outperform by around 4%. Amcor sells a wide range…
To keep reading, enter your email address or login below.
While factors such as the rotation to defensive, high-yielding stocks could be contributing to the stellar performance, it’s the immensely successful business model of Amcor which has delivered strong gains with minimal volatility. The past 12 months has seen only one drop of greater than 10% for Amcor, and the recent 10% pull back in the Australian share market has seen Amcor outperform by around 4%.
Amcor sells a wide range of packaging solutions to emerging and developed markets through most commercial and consumer segments. It’s well exposed to defensive sectors such as food, tobacco and the ever-growing healthcare sector. Amcor reports earning via its three divisions: flexible packaging, rigid plastics and Australasia and packing distribution. The divisions accounted for 62%, 24%, and 14% of earnings respectively in FY12. The results were typically solid for Amcor, with an 11% increase in earnings per share and a 6% increase in dividend to a yield of around 4.4% at the current price.
The company operates globally, with sales spread between North America (30%), Western Europe (26%), Australia and New Zealand (22%) and Emerging Markets (20%) such as China, Thailand, Indonesia, India and Singapore.
Exposure to emerging markets will be particularly important in the coming years. Global growth in packaging is expected to continue to be primarily from emerging markets. Amcor has recorded 18% compound annual growth over the last 10 years and expects 10-15% growth in the coming years. Demand is expected to improve with increased urbanisation and incomes in the world largest emerging economies, China, India and Indonesia.
Diversification across industries and countries gives Amcor a competitive advantage over its peers Bemis (NYSE: BMS) and Sealed Air (NYSE: SEE). Amcor has a reputation for quality, reliability, service, and above all, competitive prices. These characteristics lead to high sales volumes, giving the company benefits of scale such as purchasing power and efficient manufacturing.
While all of the above factors are extremely positive in the medium term for Amcor, the biggest single near-term impact on earnings may come from the depreciation of the Australian dollar. Amcor recently provided data on the company’s currency sensitivity. With 56% of earnings coming from North America and Europe, every 1 cent drop of the EUR and USD verses the AUD will result in a net profit after tax boost of $5 million and $3 million respectively. In the past six months, the AUD/EUR and AUD/USD have dropped 8 cents each, potentially resulting in a $50+ million increase in profit if the current exchange rate is maintained for CY13.
The key risks to the company include a higher Australian dollar, and reduced margins due to higher material costs and increased competition in less specialised markets such as bottles and cans.
Amcor is a well diversified, global company with exposure to the fastest growing economies in the world. It delivered strong EPS growth in FY12 and is expected to do the same in FY13 on the back of a lower Australian dollar and improving demand in emerging markets. The company pays a healthy dividend of 4.4% unfranked and will see strong profit growth if the economies of Europe and America continue to strengthen. Amcor appears to be a perfect stock for investors looking for exposure to China and India, as well as the Australian dollar.
Are you looking for a higher, fully franked yield? Click here now to get The Motley Fool’s special FREE report, “3 Stocks For the Great Dividend Boom”. The report lists the names, stock symbols, and full research for our three favourite income ideas, all completely free!
Motley Fool contributor Andrew Mudie does not own shares of any companies mentioned.