EUR 850.00 For Business Accounts Only

Morningstar | Aptar Continues Expansion Into Healthcare With Acquisition of CSP

Aptar's strong second-quarter earnings release was paired with the announcement that the company has entered into an agreement to acquire healthcare packaging company CSP Technologies for $555 million. In Aptar's key pharmaceutical segment, results remained solid through the second quarter, while the beauty and home segment turnaround is still in progress. While the deal to purchase CSP looks slightly expensive, this is more than offset by positive time value of money effects. Accordingly, we've increased our fair value estimate to $86 per share from $85. Our narrow moat rating is firmly in place.

Pharma segment performance remained strong in the second quarter. Sales rose 18% versus the prior year, with more than half of that in the form of organic growth. Positive currency effects made up the rest. Impressively, operating margins climbed to 31%, up 1.4% from the prior year. This growth was spurred by a number of key wins in the ophthalmic category, but management noted that performance was broadly strong in the segment. Though we think a combination of patents and high switching costs from this segment support continued economic profit generation, we do think there is a limit on segment profitability. However, we expect operating profit margins to remain fairly steady for the foreseeable future.

Both Aptar's beauty and home segment and food and beverage segment saw margin pressures versus the prior year but continue to generate organic growth in the high single digits. Segment income in beauty and home fell meaningfully on a GAAP basis as restructuring efforts remain in full swing. Neither of these segments is poised to be a key driver in Aptar's success, but we do expect margins to improve, a much-needed tailwind compared with recent segment results.

Strategically, CSP should fit well within Aptar's business. CSP's end markets are split roughly 75% pharma and 25% food service, and the company generates EBITDA margins just slightly lower than those of Aptar's pharma segment. CSP is best known for multistage polymer liners that are critical to a variety of medical and food-service applications designed to mitigate spoilage or infection risk. These products will add to Aptar's already rich portfolio of pharmaceutical packaging capabilities.

While we believe the strategic merits of Aptar's purchase of CSP are well founded, the price could prove to be a bit high. The acquired business earned an estimated $44 million in trailing 12-month EBITDA on $140 million in sales. That makes the purchase price of $555 million just short of 13 times trailing 12-month EBITDA. Given management's commentary that it will keep the bulk of CSP's management team around to run the business, we think synergies will be limited in the deal. Using Aptar's ability to convert EBITDA to free cash flow as a baseline, we think the company should only garner a 12-13 times price if it can sustain 5% growth indefinitely.

Aptar management is participating at the Management Behind the Moat conference at Morningstar’s Chicago office Nov. 7-8. If you are interested in attending the conference, please reach out to your sales representative for registration information.