Yeah I have looked at that one, but their ROIC (tangible capital only) is half of the other plastic packaging companies. Its mean NTM PE ratio was only 8.7x in the past 15 years.
Also cannot figure out what French dividend withholding tax is, is it 25% or 12.8%?
That's consistent with the following year-end numbers in the 10-K:
EBITDA: $2.2 billion
Cash: $1.1 billion
Debt: $9.5 billion
Net debt: $8.4 billion
8.4/2.2 = 3.8
They've crept above 4x as of the last quarter end due to working capital movements causing net debt to increase, but if their projections for the next two quarters are anything close to correct, they'll be back below 4x by then. Management confirmed this calculation on the last call:
[Analyst]
Just one on my end on the capital deployment side of things. I think as of quarter end, you're maybe a little bit above 4x levered. So I guess, A, where would you expect net leverage to be by year-end? And does that kind of impact your way at all in your pace of buybacks? Obviously, you picked it up a bit near term, but just how should we think about that balance between net leverage and buybacks this year?
Thomas Salmon
We continue to believe after the full year, we'll be able to operate the company within our targeted range [i.e., 3 - 3.9x] , and it's reinforced by the fact that the majority of our cash flow generation typically occurs in the fourth quarter -- third and fourth quarter, sorry.
***
Part of the confusion may arise from the fact that same data sources do not appear to match the SEC filings. For example, I could not reconcile Tikr's numbers with what's in the 10-K.
I used ltm numbers on TIKR. And estimated EBITDA of $2.15bn for 2022. Pay down $2bn and get EBITDA to $2.4bn and it is almost exactly 3x.
There will be an unloading of working capital if oil prices creep down of about $4-500m on top of FCF as well. But for a proper rerating, I think it needs to go in the low 3.x range, and there needs to be a dividend. If a working capital movement can push debt to 4.x then the stock will still be considered risky.
It really seems like a no brainer to me, part of why I wrote it up, to see if anyone could come up with a good argument to not own this.
Isn't the EV/EBITDA multiple almost identical to Amcor's? The difference in P/E is due to leverage - why should that make Berry more attractive? It is simply more volatile.
EV/EBITDA of Amcor is 12 vs 8 for Berry. If Berry pays down debt for 2-3 years, debt load will be pretty similar to Amcor. So including buybacks, that is a pretty attractive low risk potential return.
You are right, I had the impression it was closer - although still nowhere as great a difference as in terms of P/E, which you first highlighted, due to the leverage. Still, how do you know that 12x EBITDA is the right multiple for a business like Amcor or Berry? Maybe Amcor is too expensive? These companies convert 50% of EBITDA to cash. Berry's 8x implies 16x FCF which is a 6% yield. Adding 3% organic topline growth (already pushing it - Berry's volumes have been flat historically I believe) gives you 9% unlevered return before multiple expansion, which too me looks pretty close to Berry's WACC - maybe it should be slightly lower but does not look super attractive to me. Just giving some pushback because I like the sector and would like to like Berry.
The NTM PE is 100% higher for Amcor. Mean NTM PE multiple was 14x for Berry over the past decade and 16x for Amcor. So I am assuming the market was probably correct for most of that time.
Historically FCF equals net income, only recently due to working capital movements because of rapidly rising oil prices has FCF deteriorated. But that is one off, and will revert in favor of the company if oil prices come down. Expectation despite that for this year is still $900m-1bn of FCF. So not sure where you get a 6% FCF yield.
I think volumes will probably grow 1-3% per year in most years. Reason it was flat historically was because of closing down of low return lines of acquired companies, and more recently supply chain issues.
The 6% yield is unlevered. BERY produces a lot more cash relative to its market cap but that is because it is highly levered… Was the historical P/E for BERY under similar leverage levels as of today?
The thesis here is (as I outlined in article), they pay down debt to a more acceptable level of 3x EBITDA, and then underlying shares will probably trade at a 7-8% levered FCF yield. Since at 3x EBITDA, the company is in a position where they can payout 2/3 of their FCF. Which would be about a 5% buyback/dividend yield. Which would give about 70-90% upside here (depending on how much they end up buying back before the stock moves up).
Even if you believe the current EV is fairly valued, then in the next 3 years they could reduce share count by 15m and debt by $2bn. Giving a 15% annual return.
Groupe Guillin SA is another pretty good comp - 'cheaper' than both the above.
Yeah I have looked at that one, but their ROIC (tangible capital only) is half of the other plastic packaging companies. Its mean NTM PE ratio was only 8.7x in the past 15 years.
Also cannot figure out what French dividend withholding tax is, is it 25% or 12.8%?
Seemed like a weaker business than berry which was what originally sent me there, so I didn't spend too much time on it.
Are they already effectively below 4x levered? As of the last fiscal year-end, they claimed to be at 3.8x. See slide 7: https://ir.berryglobal.com/static-files/efe6c178-871e-4f28-919f-a790c5e32a35
That's consistent with the following year-end numbers in the 10-K:
EBITDA: $2.2 billion
Cash: $1.1 billion
Debt: $9.5 billion
Net debt: $8.4 billion
8.4/2.2 = 3.8
They've crept above 4x as of the last quarter end due to working capital movements causing net debt to increase, but if their projections for the next two quarters are anything close to correct, they'll be back below 4x by then. Management confirmed this calculation on the last call:
[Analyst]
Just one on my end on the capital deployment side of things. I think as of quarter end, you're maybe a little bit above 4x levered. So I guess, A, where would you expect net leverage to be by year-end? And does that kind of impact your way at all in your pace of buybacks? Obviously, you picked it up a bit near term, but just how should we think about that balance between net leverage and buybacks this year?
Thomas Salmon
We continue to believe after the full year, we'll be able to operate the company within our targeted range [i.e., 3 - 3.9x] , and it's reinforced by the fact that the majority of our cash flow generation typically occurs in the fourth quarter -- third and fourth quarter, sorry.
***
Part of the confusion may arise from the fact that same data sources do not appear to match the SEC filings. For example, I could not reconcile Tikr's numbers with what's in the 10-K.
I used ltm numbers on TIKR. And estimated EBITDA of $2.15bn for 2022. Pay down $2bn and get EBITDA to $2.4bn and it is almost exactly 3x.
There will be an unloading of working capital if oil prices creep down of about $4-500m on top of FCF as well. But for a proper rerating, I think it needs to go in the low 3.x range, and there needs to be a dividend. If a working capital movement can push debt to 4.x then the stock will still be considered risky.
It really seems like a no brainer to me, part of why I wrote it up, to see if anyone could come up with a good argument to not own this.
Isn't the EV/EBITDA multiple almost identical to Amcor's? The difference in P/E is due to leverage - why should that make Berry more attractive? It is simply more volatile.
EV/EBITDA of Amcor is 12 vs 8 for Berry. If Berry pays down debt for 2-3 years, debt load will be pretty similar to Amcor. So including buybacks, that is a pretty attractive low risk potential return.
You are right, I had the impression it was closer - although still nowhere as great a difference as in terms of P/E, which you first highlighted, due to the leverage. Still, how do you know that 12x EBITDA is the right multiple for a business like Amcor or Berry? Maybe Amcor is too expensive? These companies convert 50% of EBITDA to cash. Berry's 8x implies 16x FCF which is a 6% yield. Adding 3% organic topline growth (already pushing it - Berry's volumes have been flat historically I believe) gives you 9% unlevered return before multiple expansion, which too me looks pretty close to Berry's WACC - maybe it should be slightly lower but does not look super attractive to me. Just giving some pushback because I like the sector and would like to like Berry.
The NTM PE is 100% higher for Amcor. Mean NTM PE multiple was 14x for Berry over the past decade and 16x for Amcor. So I am assuming the market was probably correct for most of that time.
Historically FCF equals net income, only recently due to working capital movements because of rapidly rising oil prices has FCF deteriorated. But that is one off, and will revert in favor of the company if oil prices come down. Expectation despite that for this year is still $900m-1bn of FCF. So not sure where you get a 6% FCF yield.
I think volumes will probably grow 1-3% per year in most years. Reason it was flat historically was because of closing down of low return lines of acquired companies, and more recently supply chain issues.
The 6% yield is unlevered. BERY produces a lot more cash relative to its market cap but that is because it is highly levered… Was the historical P/E for BERY under similar leverage levels as of today?
Historical PE was at higher levels of leverage.
The thesis here is (as I outlined in article), they pay down debt to a more acceptable level of 3x EBITDA, and then underlying shares will probably trade at a 7-8% levered FCF yield. Since at 3x EBITDA, the company is in a position where they can payout 2/3 of their FCF. Which would be about a 5% buyback/dividend yield. Which would give about 70-90% upside here (depending on how much they end up buying back before the stock moves up).
Even if you believe the current EV is fairly valued, then in the next 3 years they could reduce share count by 15m and debt by $2bn. Giving a 15% annual return.