While a successful business and one that has delivered respectable returns to shareholders over the last 10 years, Amcor Limited (ASX: AMC) doesn’t have many of the attributes I look for in a great business. In fact, apart from a brief stint in 2007, I’ve never been a shareholder. Here’s why:
- It’s capital intensive
Amcor runs a pretty lean operation, with impressive margins for a manufacturer, but it is hard to get past the fact that the business requires constant capital investment to upgrade its plants. Amcor is also growing constantly by acquisition, which can add value for shareholders, but also means that free cash flow lags well behind profit in most years.
- It uses a lot of debt
In its first half 2018 report, Amcor currently has net debt to ‘profit before interest, tax, depreciation and amortisation’ (PBITDA) of 2.9x. PBITDA was $695 million (half year) and net debt was $4,353 million. I think this is a somewhat riskier metric because PBITDA excludes Amcor’s huge depreciation and amortisation expense (around $350 million a year).
Depreciation is a real expense for manufacturers as it reflects declining equipment that must be replaced. While PBITDA might reflect the company’s covenants with bankers, from an investment perspective I would consider the company’s debt somewhat higher.
- It’s a slow growth industry
According to various industry sources, the flexible and rigid packaging industries are growing at a couple of percent annually. These industries are also sensitive to higher raw material costs as well as volumes in the end markets.
There are however a variety of opportunities in areas like sustainable packaging and specialty cartons, which Amcor is positioned to take advantage of.
Overall I think Amcor is the kind of company that legendary investor Peter Lynch would describe as a ‘stalwart’. It’s done well for shareholders, but it’s now also a very highly indebted stalwart. I think the company’s upside is modest while the risks – having to make acquisitions to grow, and having very high debt – are rising. I continue to avoid it.
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Motley Fool contributor Sean O'Neill 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 Scott Phillips.