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Macquarie Group Ltd: It’s time to buy Amcor Limited shares

The share price of Amcor Limited (ASX: AMC) is staging a bit of a fight back as it recovers from its morning falls, but the stock is still firmly on a downtrend and yesterday’s profit result isn’t helping.

Bargain hunters can rub their hands in glee as Macquarie Group Ltd (ASX: MQG) believes this is an excellent opportunity to buy the packaging company even as it delivered a mixed result that was dragged down by higher input costs, a surprising softness in its Rigids business and challenging conditions in its emerging markets operations.

The stock fell to $14.30 in early trade before bouncing by 1% to $14.53 just before the close. This takes Amcor’s 12-month share price loss to 4.2% when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 1.7%.

The results have divided analysts but the outlook for the stock centres on whether you think the challenges are cyclical or structural. The former suggests that these headwinds will ease as the economic cycle turns while the latter suggests a permanent and perhaps growing problem for Amcor.

Macquarie is convinced Amcor’s issues are temporary. For one, higher input costs are expected to ease as the broker believes resin prices will peak in the current quarter before easing for the rest of the year as more resin supply hits markets in the US.

The broker also believes the outlook for Amcor’s North America Rigids division is positive and is expecting growth of 1% to 2%.

Pepsi/Gatorade is a very large customer of Amcor in the US and that has been part of the problem, but Macquarie is optimistic on the outlook on Pepsi’s 2018 prospects.

Further, headwinds that have buffeted Amcor in emerging markets for the past two years will also ease, according to the broker. Rigid packaging demand in Latin America is stabilising along with other markets and higher input costs are slowly being recovered.

“On a through the cycle basis, AMC has a strong emerging markets position and remains a growth area given AMC’s 30% EM [emerging market] exposure is U/W [underweight] relative to 40%-50% from the likes of Nestle/Unilever,” said the broker who has an “outperform” rating on the stock with a price target of $16.15.

“The stock has de-rated and is now trading at an 11% PE [price-earnings] premium to market in FY18 but only 3% premium in FY19 vs its long term 10% premium. Non-recurrence of raw material headwinds (US$25m), normalised Rigids demand & further expected € gains should drive strong EPS [earnings per share] growth in FY19.”

Interestingly, while emerging markets have been a thorn in the side for Amcor, they have been a boon for glove maker Ansell Limited (ASX: ANN), which is also a re-rating candidate [please correct insert link] for 2018.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. 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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