CCL’s Q2 was not as bad as originally expected. But whatever course COVID-19 takes, we think the packaging and container manufacturer is well positioned for long-term growth.
Manufacturing stock CCL’s second-quarter sales decline was not as severe as previously anticipated. Management had projected a 15- to 20-per-cent decline in revenue for the quarter. As it was, sales declined just 10 per cent. April and May were tough, but sales in June were above those of a year earlier, partly aided by two additional working days.
Though profitability deteriorated during the quarter, it could have been worse. Management says profitability benefited from strong productivity, swift cost savings initiatives to match activity levels and, to a lesser extent, government support where available.
CCL Industries Inc. (TSX—CCL.B) operates 183 production facilities in 42 countries. The company runs four business segments. The first, CCL, converts pressure sensitive and specialty extruded film materials. The second, Avery, supplies labels, specialty converted media and software solutions. The third, Checkpoint, develops radio frequency and radio frequency identification based technology systems. And the fourth, Innovia, produces engineered films for label, packaging and security applications.
Sales and earnings decline
For the second quarter ended June 30, 2020, CCL made $103.9 million, or $0.58 a share ($0.59 adjusted), compared with $121.3 million, or $0.68 a share ($0.69 adjusted), in the same period of 2019.
Sales declined 9.8 per cent to $1.2 billion. Organic sales declined 12.4 per cent, but were partly offset by 2.2-per-cent acquisition-related growth and a 0.4-per-cent positive impact from foreign currency translation.
Operating income declined 17.7 per cent (18.2 per cent excluding foreign currency translation) to $163.6 million.
CCL appears to be in good financial shape. The company’s leverage ratio, which in this case is its net debt to adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) ratio, is just 1.78. That’s well below four times, which is the level that would cause concern about its ability to manage its debt load.
Then too, CCL’s free cash flow after dividend payments for the second quarter was $88.6 million. Consequently, the company’s dividend, which currently yields 1.4 per cent, seems safe for now.
Well-positioned for long-term profit growth
CCL says it’s impossible to predict the impact of the coronavirus pandemic on its full-year 2020 financial results with any certainty. But the company has noted that its CCL segment returned to more normalized demand patterns in the summer. And its Avery and Checkpoint segments, which reported dismal decreases in operating income for the second quarter, nonetheless posted solid results in June as economies and retailing opened up.
In the end, much will depend on the course the pandemic takes in coming quarters. But we believe the company is well positioned to weather the near-term difficulties and return to long-term profit growth when conditions ease.
CCL’s earning per share are expected to fall from $2.79 in 2019 to $2.55 in 2020 and rebound to $2.81 in 2021. The stock trades at 19.5 times the 2020 estimate and 17.7 times the 2021 estimate, both reasonable multiples in our view. Buy mostly for growth.
This is an edited version of an article that was originally published for subscribers in the October 9, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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