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You can look at the shares of CCL Industries Inc. – hitting 52-week highs, up about 75 per cent in 2015 and having gained a stunning 500 per cent over the past three years – and experience a case of sticker shock.
Or, you can see a company with some of the best sales and profit growth in its sector, a nearly debt-free balance sheet, and a track record of value-building acquisitions, and label it well worth the price.
Investors are choosing the latter perspective for CCL Industries, which, if you read right past my puns, is a leading maker of "pressure-sensitive and extruded film materials for decorative, instructional and functional applications" – what ordinary folk call "labels." The company's customers are in the consumer-products industry, as may be expected, but also in the health-care, technology and automotive industries.
At first blush, the labels business is dull and rather cyclical; if people aren't buying as much stuff that requires a sticker on the front, the label makers sell less. The default assumption is that the industry's sales grow more or less in line with economy. CCL expects revenue gains in low- to mid-single digits in the long term, says analyst Adam Josephson of KeyBanc Capital Markets Inc.
That, to be clear, is CCL's forecast for the industry as a whole, not for itself. With the aforementioned clean balance sheet – a ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of just 1.2, according to S&P Capital IQ – CCL is able to make deals to enhance its product line, building on whatever organic gains it can make from new products and new customers.
CCL demonstrated this power in July, 2013, when it bought Avery, its consumer and small-business segment, from Avery Dennison Corp. for $500-million (U.S.) in cash. The Avery business then proceeded to exceed CCL's expectations in 2014, as CCL quickly cut costs and added new digital products. When the company closed the books on 2014, it was able to report a record level of free cash flow and a return on equity of nearly 20 per cent, according to Capital IQ.
This thesis – high and growing profit through smart acquisitions – has caused investors to "rerate" CCL stock. TD Securities analyst Damir Gunja notes that CCL traded below its peers on an enterprise value-to-forward-EBITDA basis for most of the period from November, 2010, through early 2014. (Enterprise value is market capitalization plus net debt.) Over the past year, however, CCL's multiple has spiked well above comparable companies, with an EV/EBITDA of 13.5, versus an average of roughly 10 for the others.
That is not likely to change soon, for if CCL is becoming a "story stock," its most recent deal boldly underscores the narrative. Earlier this month, CCL announced it would buy Scottish label company Worldmark International Inc. for $252-million. Worldmark's customer base is the tech industry with clients including Apple Inc., Intel Corp., Microsoft Corp., Sony Corp. and Hewlett-Packard, Mr. Gunja says. CCL, which already collected 95 per cent of its revenue outside Canada and considered itself the No. 1 supplier of labels to domestic Chinese businesses, gets even more exposure to Asia with Worldmark, which has six of its eight plants in China.
To add Worldmark to its portfolio, CCL paid about 7.2 times Worldmark's 2015 EBITDA, above the range CCL previously said it preferred to pay for acquisitions. At the same time, Worldmark's EBITDA margins of about 16.7 per cent are below CCL's year-to-date mark of 20.3 per cent, Mr. Gunja notes.
Still, the Worldmark deal was widely applauded. Six of seven CCL analysts rate the shares a "buy," and many analysts boosted their target prices on news of the deal. (Mr. Gunja, who has a "buy" rating, raised it to $245 from $235, one of the more modest increases. CCL closed Friday at $213.85.)
Mr. Josephson of KeyBanc is the lone holdout, rating CCL shares "neutral" because of the premium investors are paying. Still, he's called CCL "a high-quality company in every respect, with impressive management" and has noted CCL's margins and profit have "consistently been among the best in the industry." The Worldmark deal, he says, should be "significantly accretive" to the company's earnings. When he introduced his "neutral" recommendation on May 14, he said "we will look for any declines in the stock to revisit our rating."
The shares have increased 50 per cent since then. Investors looking for a better entry point in CCL will likely be stuck – pardon the pun – on the sidelines.