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Is Amcor Limited a buy?

Amcor Limited (ASX: AMC) seems to be the boring, predictable type of business that Warren Buffet loves. It’s understandable, predictable, steady, and best of all, capable of being valued.

Amcor is a global manufacturer and supplier of packaging products. It services a number of industries that are heavily reliant on packaging, including the food and beverage industry, healthcare, and tobacco industries. The company has three main segments: rigid plastics; flexibles; and an other/investment segment. Its rigid plastics segment provides rigid plastic containers for drinks, alcohol, sauces, dressings, and personal care items. Its flexible plastic segments provides products for confectionary, coffee, food and drink, medical, and tobacco products.

Recently, the Amcor share price has fallen sharply. It’s down 13% from its 52-week highs. A trading warning in early November led to a steep decline, but further drawdowns have continued in the absence of any further company announcements.

Certainly, the debt levels have increased and are of some concern. With a debt to equity ratio of over 4.5 the debt levels are high on the back on increasing debt and decreasing shareholders equity.

Amcor is currently trading at a price to earnings ratio of around 18, which is higher than the market at around 17, and the sector at around 15. So you’ll be paying a small premium for Amcor. However, given the debt that is being carried, using an enterprise multiple to ascertain value may be worthwhile. Enterprise value is simply market capitalisation minus debt plus cash or equivalents. Amcor has an enterprise value of around $21.4billion dollars. And with EBITDA of approximately $1.89 billion, Amcor is trading at an Enterprise Multiple of a little over 11.

Foolish Takeaway

Current multiples most likely represent fair value for a steady company. However, the high levels of debt dissuade me from buying at this time. I am inclined to wait for signs that the debt can be paid down and shareholder equity increased. Nonetheless, Amcor is a reliable company with predictable earnings, and investors could do worse.

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Motley Fool contributor Stewart Vella has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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