We featured a list on Friday of 18 Canadian mid-cap stock leaders that had year-to-date returns of at least 10 per cent and have at least a 10-per-cent return forecast by analysts for the next 12 months. In our first round, we featured Stella-Jones Inc. Today, we delve into a second stock that appeared on our screen – CCL Industries Inc.
CCL Industries: The business
Toronto-based CCL Industries is a global specialty packaging company that operates three main business segments and provides services to large multinational customers: Label, Avery, and Container. In terms of geographic exposure, 56 per cent of 2014 sales were from North America, 28 per cent from Europe and 16 per cent from emerging markets.
The company has delivered strong financial results. In 2014, sales topped $2.5-billion and increased 36.8-per-cent year-over-year. Most of this gain was acquisition growth, and 3.8 per cent from organic growth. Return on equity surpassed 20 per cent in 2014. Solid performance continued in the first quarter of 2015. CCL delivered 15.8-per-cent sales growth compared to the prior year, of which 5.5 per cent was organic, or internal, growth.
Solid results were achieved across all three of the company's operating segments, with solid revenue growth and EBITDA margin expansion. In addition, the company reported record quarterly earnings.
CCL Label is the company's largest segment, representing 66 per cent of 2014 sales. The Label segment is the global leader in producing labels in markets such as household, personal and beauty care, and food and beverage. It also supplies labels to the health care and automotive segments, among others. Last quarter, sales in Label grew 15 per cent year-over-year to more than $486-million. Of that 3.8 per cent was organic growth, and margins expanded 0.4 per cent to 23.5 per cent.
Avery, representing 26 per cent of 2014 sales, provides software solutions to help customers design online or download templates to digitally print products such as shipping labels, business cards and tags. Avery also produces its well-known office supplies, such as Avery highlighters and binders. Last quarter, sales at Avery grew 21 per cent year-over-year to $160.2-million and margins expanded 6.3 per cent to 18.7 per cent.
CCL Container, representing 8 per cent of 2014 sales, is a leading manufacturer of aluminum aerosol containers and bottles for brands in the North American home and personal care and food and beverage markets. First-quarter 2015 sales in the Container segment increased 12 per cent year-over-year to $59.6-million, with margins increasing 2.9 per cent to 20.8 per cent.
Capacity to grow
CCL has a very strong balance sheet to support future growth, both organically and through acquisition growth. At the end of the first quarter, the company's net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) was low at just 1.1 times, representing a very under-levered balance sheet. On a first-quarter conference call, management indicated that "the acquisition pipeline is certainly very solid."
Institutional ownership
CCL is classified as a stock in the Materials sector, yet it is not exposed to the same risks as, for instance, metals and mining stocks. Due to its classification, some institutional investors, whom typically manage diversified portfolios and have to hold a certain amount of stocks in the materials sector, opt to own CCL.
Dividend yield
The company's quarterly dividend increased by 25 per cent in March of this year to 37.5 cents per share from 30 cents per share. Given the company's solid free cash flow generation, we could see yet another increase to its dividend. This could be announced either when the company reports second-quarter results (tentatively scheduled for July 31), or later this year. The current yield is just under 1 per cent.
Valuation
The stock is trading near its peak valuation. Trading at a consensus 2016 enterprise value/EBITDA multiple of 10 times, it is at a premium to its one-year average of 9 times. There are analysts that base their one-year target prices on the multiple expanding to the 10.5-times to 11-times range.
Chart watch
The stock price has climbed more than 24 per cent year-to-date and reached a record high on May 8 at $157.85. The stock price is nearing an overbought condition, with the relative strength index at 63. Generally a reading at or above 70 suggests the stock is overbought. There is technical resistance at $158, then $160, and technical support at $150, $147.50 (near its 50-day moving average), and $144.
Analysts' recommendations
Five analysts have "buy" recommendations, while one has a "sector weight" recommendation – which is the equivelent of a hold. No analyst is recommending to sell. One-year price targets range from $165 to $202, with an average of $176.80, implying a potential return of 13 per cent. The stock has had positive earnings revisions, with the current consensus earnings expectations of $7.50 in 2015, climbing more than 10 per cent to $8.29 in 2016.
The bottom line
CCL Industries should benefit from improving economic conditions. The company offers investors growth potential with its strong balance sheet. The dividend is safe, with an increase potentially in the near term. However, the stock price has increased more than 8 per cent since June 16, and the valuation is near its peak. I recommend waiting for a pullback to accumulate shares.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com
Jennifer Dowty