Morningstar | Core Sales Growth Remains Solid for Aptar in 3Q, but Rising Input Costs Impact Bottom Line. See Updated Analyst Note from 02 Nov 2018
Aptar wrapped up a decent third quarter, with core sales growth of 7% versus the prior year and consolidated operating income up an impressive 18%. The lag between material cost inflation and price increases compressed margins the Beauty and Home segment as well as the Food and Beverage segment. A stronger dollar provided currency headwinds, as well. We've slightly trimmed our profit outlook for this year and next to account for these factors. However, the updates are not enough to warrant a change to our $86 per share fair value estimate. In addition, we're leaving our narrow-moat rating in place.Pharma segment performance was solid, with operating income up 33% from last year to $73 million, driven by wider margins, 12% core sales growth, and the recent CSP acquisition. Prescription sales growth was roughly 15%, driven by nasal applications for both allergies and central nervous system conditions, with high-single-digit growth for both consumer and injectables end uses as well. Over the longer term, we expect total sales growth to slow as Aptar becomes a larger business and incremental penetration opportunities become a bit more limited. Even so, we think a long-run revenue growth rate of 6% isn't unreasonable given favorable demographic trends in developed markets.
The remaining segments generated strong sales growth but margins were squeezed by restructuring costs in Beauty and Home, as well as lagging price increases. Adjusted operating income in Beauty and Home remained in line with last year at $22 million, despite a 2% increase in sales. While we have yet to turn the corner into margin improvement, management reiterated that restructuring efforts to boost margins are on track. We think this will improve segment margins over the next few years. In Food and Beverage, adjusted operating income softened as higher resin costs will take time to pass through contracts. For the segment, we forecast low-double-digit operating margins over time.
AptarGroup is a supplier of a range of dispensing, sealing and active packaging solutions for the beauty, personal care, home care, prescription drug, consumer health care, injectables, food and beverage markets. The company's primary products are dispensing pumps, which dispense a spray or lotion from non-pressurized containers; closures, which are plastic caps that allow a product to be dispensed without removing the cap; aerosol valves, which dispense product from pressurized containers; and elastomeric primary packaging components, which include stoppers for infusion, antibiotic, lyophilization and diagnostic vials, pre-filled syringe components, as well as dropper bulbs and syringe plungers.
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