Merger Will Expand Packaging Portfolio And Tap Into Faster-Growing Markets

Key Takeaways

• The merger with Berry Global aims to enhance growth by expanding Amcor's packaging portfolio and achieving significant synergies, improving revenue and margins.
  
• Enhanced R&D and innovation focus could drive growth in sustainable packaging, while strong cash flow supports investments in growth and financial stability.
  
• Destocking and soft demand challenge revenue and margin growth, while integration risks and raw material cost uncertainties threaten financial projections.

Catalysts

Develops, produces, and sells packaging products in Europe, North America, Latin America, and the Asia Pacific.

• The merger with Berry Global is expected to enhance Amcor’s growth potential by expanding its primary packaging portfolio and focusing on higher-value, faster-growing end markets. This expanded portfolio is likely to positively impact revenue growth and improve margins through a more attractive product mix.
  
• The companies anticipate significant synergies of $650 million, with 40% expected in the first year after the merger. These synergies, primarily from procurement, SG&A, and operational efficiencies, are expected to enhance earnings and cash flow.
  
• A focus on improving R&D and innovation capabilities, leveraging a combined investment of $180 million and more than 1,500 R&D professionals, aims to drive growth in more innovative and sustainable packaging solutions, potentially boosting revenue through differentiated, high-demand products.
  
• The end of destocking in the healthcare segment, which has been a drag on volumes, is expected to lead to a return to growth. This trend could help improve revenue and margins due to an enhanced product mix.
  
• Strong cash flow generation of over $3 billion annually from the merger with Berry allows Amcor to maintain an investment-grade balance sheet and invest in organic growth and M&A activities, potentially leading to higher long-term EPS growth and improved financial health.

Amcor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Amcor's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 7.5% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $0.76) by about March 2028, up from $795.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.7x on those 2028 earnings, up from 17.2x today. This future PE is lower than the current PE for the AU Packaging industry at 22.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.89%, as per the Simply Wall St company report.

Amcor Future Earnings Per Share Growth

Risks

• The ongoing destocking in health care and soft demand in the North American beverage business have impacted overall volumes and mix, which could potentially hinder revenue growth and affect net income margins.
  
• Concerns about consumer demand softening modestly could result in slowed sales growth, negatively impacting revenue projections and earnings.
  
• The integration with Berry has no assurances of synergy realization or successful integration, which poses a risk of potentially undermining cost efficiencies and financial projections.
  
• While destocking is expected to be over, any lingering effects or misjudged timelines could continue to weigh on health care volumes, influencing sales revenues and margin quality.
  
• The uncertainty around raw material costs, with mixed expectations across regions, could lead to unfavorable cost management and pressure on profit margins if not aptly managed.

Valuation

• The analysts have a consensus price target of $11.468 for Amcor based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.5 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 6.9%.
• Given the current share price of $9.44, the analyst price target of $11.47 is 17.7% higher.
• 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.