Those looking for a value stock to sink their teeth into during the market weakness should have a closer look at packaging company Amcor Limited (ASX: AMC).
Its share price is slipping 0.8% to $13.22 at the time of writing even as two brokers upgraded their recommendation on the stock following management’s update yesterday at its annual general meeting.
The drop in the stock comes as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) slipped a further 0.1% into the red after posting a close to 3% crash yesterday.
Amcor has plenty of space to play catch-up with the stock down 15% over the past year as the stock hit a two-and-a-half year low of $13.12 on Wednesday, although I suspect we might have seen the lows and I am not the only one turning bullish on the stock.
“Given the recent pullback in shares and a positive start to FY19, we believe risk-reward has turned favorable and upgrade AMC to Buy,” said Citigroup.
“Pleasingly, the recovery in NAM [North American] beverage volume and EM [emerging market] performance continues, with AMC reiterating FY19 guidance. In our view, merger completion with BMS [Bemis], which AMC expects by 1Q CY19, is the next key catalyst.”
Credit Suisse also thinks Amcor is looking cheap and has upgraded its recommendation on the stock to “outperform” from “neutral” on the back of the company’s AGM update.
“Amcor’s share price has fallen below our DCF-based target price and Amcor should be able to execute the Bemis transaction well given that it is in Amcor’s specialty of expertise and largely based in developed markets (lower revenue risk),” said the broker.
“If Amcor delivers on the US$180mn Bemis synergy objective FY20 and 21 EPS growth should be about 8%-9%.”
However, investors will need to be mindful of the impact of rising bond yields on the stock, cautioned Credit Suisse.
Amcor’s low cost of capital means a small increase in the risk-free rate (the US 10-year Treasury yield is normally used here) will trigger a fairly large change in valuation. The broker noted that a 0.5 percentage point rise in US bond yields will lower its discounted cash flow (DCF) valuation by US80 cents a share.
Fortunately, the strengthening US dollar will offer some cushioning to rising bond yields and Amcor’s key customers are in tobacco, health and food, and beverage industries – sectors which are less impacted by economic cycles.
Further, Amcor has the capacity to make further acquisitions after Bemis (it helps that it’s buying the US company with scrip) and/or undertake a capital return.
Credit Suisse has a price target of $14.80 on the stock while Citi has a $15.00 a share target.
Amcor isn’t the only stock with large US market exposure. Building materials group Boral Limited (ASX: BLD), gaming machine maker Aristocrat Leisure Limited (ASX: ALL) and blood products company CSL Limited (ASX: CSL) are some other stocks that are strongly leveraged to the greenback.
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Motley Fool contributor Brendon Lau owns shares of Aristocrat Leisure Ltd. and Boral 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 Scott Phillips.