Synergy Execution And Flat Volumes Will Shape Long Term Packaging Prospects

Catalysts

About Amcor

Amcor is a global supplier of consumer packaging and dispensing solutions for Nutrition, health care and Beauty and Wellness end markets.

What are the underlying business or industry changes driving this perspective?

• Although the Berry combination is expected to deliver at least $260 million of synergies in fiscal 2026 and $650 million through fiscal 2028, integration risks, headcount reductions of more than 450 roles and complex procurement programs could limit how much of this flows through to EBIT margin and EPS if execution becomes harder as the easy wins are exhausted.
• While management highlights more than $70 million in annualized revenue synergies already awarded and more than 10 growth initiatives, these wins rely on cross selling and combined solutions that can be slower to scale if large customers delay packaging changes, which would affect the timing of expected revenue growth and operating leverage.
• Despite targeting core categories such as Nutrition, health care and Beauty and Wellness, recent volume trends show company volumes down about 2% and weaker demand in areas such as snacks, confectionery, fresh meat and liquids. This suggests that any long term benefit from consumer demand for packaged food and personal care could take time to translate into higher volumes and more stable net margins.
• Although management is focusing the portfolio around higher margin consumer packaging and has already agreed to sell two noncore businesses for about $100 million, the remaining noncore assets, including North America Beverage, may take longer to exit or may be sold on less favorable terms. This would influence leverage reduction plans and interest expense.
• While categories such as pet care, dairy and health care are described as resilient, softer demand in Foodservice, premium Beauty and Wellness and broader Nutrition, together with consumer value seeking behavior and substrate shifts in North American beverage, could keep overall volume growth close to flat. This would cap the uplift to EBIT margin expansion and EPS growth from these category positions.

Assumptions

This narrative explores a more pessimistic perspective on Amcor compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Amcor's revenue will grow by 10.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.3% today to 7.2% in 3 years time.
• The bearish analysts expect earnings to reach $1.7 billion (and earnings per share of $0.74) by about January 2029, up from $582.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.4 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 18.9x on those 2029 earnings, down from 33.3x today. This future PE is lower than the current PE for the AU Packaging industry at 20.8x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company has identified $650 million of cost and financial synergies through fiscal 2028, with at least $260 million expected in fiscal 2026, and management links these directly to more than 30% EPS growth over the 3-year period ending fiscal 2028. If these are delivered as planned, earnings and free cash flow could trend higher than a flat share price might imply, potentially lifting the valuation through higher earnings.
• About $10 billion of annual sales comes from 6 focus categories that management describes as large and historically growing at mid to high single digit rates with above average margins, and Amcor holds leadership positions across Nutrition, health care and Beauty and Wellness. These positions could support long term volume growth and pricing power, driving higher revenue and EBIT margins over time.
• The combined business is already winning more than $70 million in annualized revenue synergies from cross selling and combined packaging solutions, and management refers to a strong and growing pipeline. If this pipeline scales, it could support sustained volume growth in focus categories and improve earnings and net margins beyond what a flat share price would suggest.
• Management expects fiscal 2026 free cash flow of $1.8b to $1.9b, which is described as double fiscal 2025 cash flow, and plans to use asset sale proceeds and cash generation to reduce leverage toward 3.1x to 3.2x by year end. If this cash flow profile persists, the balance sheet could strengthen, interest expense could ease and higher shareholder returns could support a higher share price.
• Health care, pet care and dairy are highlighted as resilient categories with solid recent performance, and emerging markets, particularly Asia, are referenced as performing better than developed markets. If these long term secular trends in packaged food, medical products and consumer goods continue, Amcor’s volumes in these areas could grow, supporting revenue, EBIT and EPS growth that could contradict an expectation of a flat share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Amcor is $9.0, which represents up to two standard deviations below the consensus price target of $10.82. This valuation is based on what can be assumed as the expectations of Amcor's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $14.5, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $23.4 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $8.41, the analyst price target of $9.0 is 6.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.