Amcor

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Amcor is a global packaging company that provides a wide range of rigid and flexible packaging solutions to a diverse set of industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Amcor is a global leader in developing and producing responsible packaging solutions, serving industries such as food, beverage, pharmaceutical, medical, home and personal care, and other markets. They focus on creating sustainable packaging that is often critical to customers.

Revenues Distribution: Amcor operates through two segments: Flexible Packaging and Rigid Packaging. The Flexible Packaging segment offers solutions for food, beverage, pharmaceutical, and other markets, while the Rigid Packaging segment provides rigid containers for food, beverage, and other products. Geographically, Amcor is diverse, with a strong presence in North America, Europe, Latin America, and Asia-Pacific.
Industry Trends: The packaging industry is subject to several factors, including changing consumer preferences for sustainable and convenient packaging, fluctuations in commodity prices for raw materials, and changing regulatory environments. The industry is also undergoing consolidation, with larger players acquiring smaller competitors.
Margins: Amcor’s gross profit margins are relatively stable, hovering around 16% in the last couple of years. It is susceptible to fluctuations based on changing raw material costs which the company is not always able to completely pass along to its clients.
Competitive Landscape: The packaging industry is competitive, with many players of varying size. Major competitors include Sealed Air, Berry Global, and Ball Corporation. The industry is characterized by innovation and cost competition.
What Makes Amcor Different: Amcor tries to offer a differentiated, end to end solution. It has a global reach, with manufacturing plants in numerous locations to ensure low transport cost for its clients, and also a high recycling rate for sustainability efforts. The company also boasts about their ‘world-class’ production facilities that can produce at scale while minimizing material usage and waste.
Financials: Amcor’s financials show a large company with a history of constant revenue growth. The company is profitable but net profit margins fluctuate depending on macroeconomic conditions and input costs. This causes volatility in the profitability of the firm. The net debt has a slow increasing trend and is still at manageable levels (about 2x net income). The company has a strong history of paying dividends with a 4.8% yield at this time and has done significant share repurchases in the past.

Amcor’s business is heavily dependent on commodity prices (like aluminum, PET resin), so its profitability is inherently very dependent on those and may have problems to pass these increasing input costs to its clients. Although, it seems it has somewhat increased its prices to adjust to it.

Key Findings from Most Recent Earnings Calls

Management is focused on managing inflation and economic uncertainty. They are also focusing on their business’ sustainability goals.
They are focused on streamlining the business, and expanding new product lines to increase revenues while simultaneously decreasing operating expenses.
They continue to have a strong cash generation and strong liquidity to protect from volatile market conditions.
They are guiding for lower volumes in the coming year as demand cools due to rising interest rates.
They have been able to raise prices successfully to mitigate higher input costs.
They see a continuation of a low inflation environment and thus are guiding for slightly lower price growth.

Recent Problems/Controversies:

The company has had some restructuring charges, mainly related to the Russia - Ukraine conflict which has affected sales. These restructuring charges have made net income volatile and less predictable.
They had negative impact due to unfavorable foreign currency movements, which the company is actively hedging to mitigate.
They are facing problems with some cost overruns, supply-chain issues, and the ongoing inflation in the world.

Moat Analysis:

Amcor’s moat is categorized as “Narrow,” given its cost advantages in select businesses and its supply chain, which make it difficult for smaller competitors to compete but that are also not insurmountable for larger companies to take away market share.

Amcor’s moat is primarily based on:

Cost advantages: They have made significant progress and focused on lowering their manufacturing and operating costs to ensure higher profitability, but these costs are replicable by competitors. These include scaling and standardization, which allow them to optimize its cost structures and better leverage investments across its various facilities. However, they don’t have the lowest prices, as they do not have a commodity product.
Switching costs: For many of its customers in the consumer packaged goods industry, switching costs are relatively high, due to their need to reliably obtain packaging in standard forms and sizes.

However, these advantages are not very wide, given that large global companies like Amcor will face steep competition from both established global competitors and newer companies coming into the market, thus, the company does not have a wide moat.

Moat Rating: 2 / 5

Risks to Moat and Business Resilience: Several legitimate risks can undermine Amcor’s competitive advantages:
- Commodity price volatility: Large fluctuations in raw material prices, such as those for plastics and aluminum, can impact Amcor’s operating margins. The company tries to mitigate these by setting prices and passing on the costs to the consumer, but may not be as efficient compared to competitors.
- Technological change: The development of new packaging materials and/or competing materials with a better cost structure can reduce Amcor’s advantage.
- Loss of a big customer: Due to relatively high switching costs, the company risks losing customers if they provide a subpar quality of products and services.
- Competition: New competitors with similar business models and lower costs may be able to attack Amcor’s market share and margins.

Resilience: Amcor’s business is resilient in that it serves a wide range of industries that are not highly cyclical. Its products are also essential for food, beverage, pharmaceutical, and other industries so they will have demand under most economic circumstances.

Understandability: 2 / 5

Although packaging is something used by every business and person, this company is quite complicated due to its scale, its multiple divisions, geographic coverage, and large number of customers and products, while it also has many risks from material cost, to foreign exchange, and others.

Balance Sheet Health: 4 / 5

Amcor has a healthy balance sheet with a significant amount of cash and short-term assets to cover its liabilities, and although the net debt is increasing, it is still relatively low compared to its earnings and assets and is manageable. Also, they can easily raise more cash.