Amcor demonstrates strong pricing power within its 1Q FY23 result

Shareholders in Amcor (ASX: AMC) had every right to be pleased with the company’s strong first quarter FY23 result in which the global packaging giant reported adjusted earnings (EBIT) of US$392m, up 9% on a comparable constant currency basis and a 9% jump in sales of US$3.7bn ($5.8bn).

But what the broader market either misread or underappreciated at the open, which saw the share price fall by around -4%, was the pricing power the group demonstrated - within a highly inflationary environment – which most other companies can only dream of.

During the quarter the group managed to pass on US$400m ($639m) in price rises in to offset both rising raw material costs - for its beverage, food and healthcare containers – and the unfavourable impact of 6% related to movements in foreign currency exchange rates.

Given that the group operates 225 packaging plants globally, the company’s pricing power takes on added significance.

Defensive qualities

CEO Ron Delia alluded to the company’s defensive qualities courtesy of its sheer magnitude within the industry:

“The result demonstrates the relative stability of our end market exposures, our relentless focus on recovering higher raw material costs and general inflation, and our proactive approach to drive costs out of the business,” he noted.

“Amcor delivered a strong first quarter highlighted by solid operating leverage with 3% organic sales growth driving a 10% increase in adjusted earnings per share on a comparable constant currency basis.”

Price increases

Price increases identified by the group during the three months ended September 30 included:

• Flexibles Packaging division, US$270m, up 10% on the previous period.

• Rigid Packaging division, US$130m, up 17% on the previous period.

Delia also noted that while net sales growth was in the low single-digit range in North America, Europe and Asia, growth was strong in Flexibles Packaging in India, Australia and the Asian healthcare business.

By comparison, sales volumes were lower in China due to continued lockdowns to curb the spread of covid.

First quarter highlights

• Net income up 15% to $US232m

• Adjusted earnings per share (EPS) came in at US18.1c per share, up 2% and in-line with consensus

• EPS growth guidance fell to minus -4 to 0 per cent from -1 to 4% on US dollar strength

• Constant FX EPS growth guidance of 3-8% was maintained

• Guidance for a $400m share buyback and FY23 free cashflow of US$1.0-$1.1bn were reiterated

• Adjusted FCF outflow of $400m versus $242m in 1Q22, reflects higher inventories to offset supply chain constraints, and raw material costs impacting working capital

• Quarterly dividend increased to 12.25 CPS

What brokers think

Amcor’s share price is up around 14% over 12 months but has weakened since the mid-August peak of $18.59.

Consensus on Amcor is Hold.

Based on Morningstar’s value of $17.91 the stock appears to be fairly valued.

Based on the six brokers that cover Amcor (as reported on by FN Arena) the stock is currently trading with 2.3% upside the target price of $18.57.

UBS, which has a neutral rating and $19.40 target price, believes the recent sell-off fails to reflect the sector's defensive earnings streams and expects this to be reaffirmed by upcoming trading commentary. (19/10/22).

Credit Suisse expects growing its North American presence could be a US$150m medium-term sales opportunity for Amcor but notes the company’s becoming increasing focussed on "organic, constant currency revenue growth".

The broker retains its Neutral rating and target price of $17.85.

Look out for broker upgrades later this week.

Amcor share price over 12 months.