Customer-first Strategy And Sustainability Focus Will Drive Future Demand In Packaging

Key Takeaways

• Amcor's customer-first strategy and sustainability focus aim to drive revenue growth through increased demand and improved service quality.
  
• Divestments and role adjustments seek efficiency and better capital allocation, enhancing margins and earnings.
  
• Continued challenges, including destocking in healthcare, North American beverage sector struggles, and regional demand weakness, could pressure Amcor's revenue growth and profitability.

Catalysts

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

• Amcor's strategy focuses on accelerating volume-driven organic growth by fostering a growth-oriented and customer-first mindset, which is expected to increase revenue.
  
• The newly created Chief Operating Officer role aims to leverage Amcor’s scale across global Flexible Packaging businesses, leading to efficiency gains and potentially improving net margins.
  
• Investments in Commercial Excellence and innovation frameworks are designed to enhance service quality and speed to market, which could bolster revenue growth.
  
• A heightened focus on sustainability, including a push for innovative fiber-based offerings, positions Amcor to lead in sustainable packaging solutions, expected to drive revenue through increased demand.
  
• Divestments, like the sale of Bericap North America, free capital for investment in higher-margin categories and strategic areas, potentially enhancing earnings through better capital allocation.

Amcor Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Amcor's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 7.1% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $0.74) by about January 2028, up from $766.0 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 18.6x on those 2028 earnings, up from 17.9x today. This future PE is lower than the current PE for the AU Packaging industry at 21.8x.
• Analysts expect the number of shares outstanding to decline by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.63%, as per the Simply Wall St company report.

Amcor Future Earnings Per Share Growth

Risks

• Continued destocking in higher-margin health care categories has unfavorably impacted overall company volumes and price/mix, which could continue to pressure revenue growth and profit margins if it persists longer than expected.
  
• Challenges in the North American beverage sector, with muted consumer demand and unfavorable customer mix, have led to a volume decline, affecting overall revenue growth and future earnings potential.
  
• Differing views on capital requirements with the Bericap joint venture partner led to its dissolution, indicating potential disruptions in closures business operations and future revenue contributions.
  
• Continued investment in CapEx to support sustainability and growth agendas has led to increased leverage; any inability to realize expected returns may affect free cash flow and debt reduction plans.
  
• Weak customer demand in certain regions, such as Argentina and Colombia, suggests regional economic instability that could hinder expectations for consistent volume growth and profitability.

Valuation

• The analysts have a consensus price target of $11.36 for Amcor based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.3, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.6 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 6.6%.
• Given the current share price of $9.5, the analyst's price target of $11.36 is 16.4% 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.