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Generally speaking, the packaging industry may not be viewed as one of the most exciting segments of the stock market. But what it lacks in excitement, it makes up for in the form of value. Many of the firms that operate in this space generate attractive cash flow and some of them have a history of strong growth. One interesting prospect to entertain is a firm called Berry Global Group ( NYSE:BERY ). In recent years, this company has generated attractive revenue and cash flow growth. All the while, its shares are priced at low levels, even if we assume that performance backslides to what it was in 2020. Given all of these facts, I cannot help but be bullish on Berry Global at this time.
Today, Berry Global describes itself as a leading global supplier of packaging products. These include innovative rigid, flexible, and non-woven products that are used in both the consumer and industrial end markets. Customers include players in the health care, personal care, food, and beverage markets. As might be expected, a firm with a truly global reach like Berry Global does not rely heavily on any one customer. No single customer as of this writing makes up more than 5% of the company's sales and its top ten customers combined represented only about 15% of the revenue it brings in. As of the end of last year, the company operated 118 facilities throughout the US and Canada, 29 of which were leased. It also has 137 facilities in Europe, 33 of which were leased. And it has 48 located through other countries, 28 of which are leased.
*Taken from Berry Global Group
At this time, Berry Global operates four major segments. One of these is called the Consumer Packaging International segment. According to management, this particular unit is responsible for a wide range of products such as closures, dispensing systems, inhalers and vials for medications, bottles, canisters, and so much more. This particular segment was responsible for generating 35.8% of the company's revenue in 2020 and 25.4% of its operating income. The next largest segment is called Consumer Packaging North America. And it is responsible for servicing clients in the North American market who need things like containers and pails, polypropylene cups and lids for hot and cold beverages, bottles and prescription vials, and other related products. This segment accounted for 24.3% of the company's overall sales last year. It was also responsible for 27.1% of its operating income.
The third segment the company operates at this time is called Engineered Materials. And it is responsible for things like stretch and shrink films that can be used either by hand or using machines in order to store and ship goods. It also produces converter films, can liners, cloth and foil tape products, retail bags, and more. This segment accounted for 19.9% of the company's overall revenue last year and it was responsible for an impressive 26.9% of profit. The final segment the company operates is called Health, Hygiene & Specialties. Through this segment, the company sells health products like garment materials, surgical drapes, household cleaning wipes, and face masks. It also produces components that are used in diapers, and it is responsible for the production and sale of products and components used in geosynthetics and filtration products. According to management, overall sales from the segment accounted for 19.9% of the company's revenue last year and for 20.6% of its profits.
Over the past few years, the financial performance achieved by Berry Global has been impressive. Revenue surged from $6.49 billion in 2016 to $11.71 billion in 2020. Although some of this revenue increase can be chalked up to organic growth, much of it actually came as a result of acquisitions. For instance, between 2019 and 2020, revenue grew by $2.83 billion. However, the company attributed a revenue increase of $2.97 billion to just one acquisition that it made that year. This means that other revenue sources were actually lower year over year.
So far this year, things are looking up. Revenue in the first nine months of its 2021 fiscal year came in at $10.18 billion. This represents an increase of 17% over the $8.70 billion generated the same time a year earlier. Revenue growth in the third quarter alone was 26.3%, with sales climbing from $2.91 billion to $3.68 billion. The company has seen high demand for its products, but it is worth noting that $533 million of its revenue increase, which represents 69.7% of the overall rise in sales at quarter, was attributable to the company passing through inflation costs to its customers. This shows fairly strong supplier power on its part.
On the bottom line, things have remained robust. According to management, net income was just $236 million in 2016. By 2020, it had grown to $559 million. Over that same period of time, operating cash flow expanded from $857 million to $1.53 billion. And EBITDA increased from $1.21 billion to $2.16 billion. That kind of bottom-line expansion has continued into the current fiscal year. Net income in the first nine months of the company's 2021 fiscal year totaled $505 million. That is 38.7% higher than the $364 million generated the same time one year earlier. Operating cash flow actually decreased, falling from $979 million to $912 million. But if you adjust for changes in working capital, it grew by 11% from $1.07 billion to $1.19 billion. And EBITDA increased from $1.57 billion to $1.69 billion.
For the current fiscal year, management has provided some guidance as to what investors should anticipate. The most recent guidance calls for EBITDA to be around $2.26 billion. Operating cash flow, meanwhile, should be just under $1.58 billion, while free cash flow should be around $875 million. Using this data, we can effectively price the firm. For instance, on a price to operating cash flow basis, the company is trading at a multiple of 5.9. Even if we see performance drop back to 2020 levels, this multiple is still low at 6.1. Meanwhile, the EV to EBITDA multiple of the company is 8, while if we use the 2020 figures this number ticks up modestly to 8.4. I also annualized earnings growth to end up with projected net profits of $775.5 million for the year. If this comes to fruition, it would imply a price to earnings multiple of 12 compared to the 16.6 we would get if we used the 2020 figures.
To put this all in perspective, I decided to compare the company to the five highest rated of its peers as defined by Seeking Alpha’s Quant platform. Using the price to earnings approach, I discovered that these five companies ranged from a low of 12.5 to a high of 27.2. Our prospect was the lowest of the group. but if we used the 2020 figures, there were two that were cheaper. I then did the same thing using the price to operating cash flow approach, yielding a range of 2.5 to 13.2. In this case, only one prospect was cheaper than our target whether we used the 2020 or 2021 figures. Finally, I looked at the EV to EBITDA multiple, ending up with a range of between 6.8 and 14.1. In this case, only one company was cheaper than our target in both scenarios.
Taking all of the aforementioned data, it looks to me as though Berry Global makes for an attractive opportunity for long-term investors who are interested in a rapidly-growing business that has successfully generated strong cash flows. Yes, the company does have a lot of debt right now. Using estimates from 2021, its net leverage ratio stands at 3.9. But that's not all bad. All things considered, the good certainly outweighs the bad at this point in time.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.