Morningstar | Bemis Exceeds Our Expectations in 2018; Reiterating Our $59 FVE Assuming Deal Closure in 2Q
Bemis' management team appears to be making significant progress on its Agility restructuring program, wrapping up 2018 with stronger sales growth and pockets of margin improvement after a dreary 2017. Consolidated sales rose 1.1% for the year despite substantial foreign-exchange headwinds in South America. Operating margins expanded 40 basis points to 9.9%. Operating income topped our expectations, as cost-saving programs yielded greater benefits than we anticipated. Bemis did not provide 2019 guidance due to the pending acquisition by Amcor, which is set to close during the second quarter. We reiterate our $59 fair value estimate and narrow moat rating.Earlier in 2018, Bemis put a number of incentives in place to generate additional sales growth and motivate employees to look anywhere and everywhere for cost savings. For the year, despite a small volume decline, U.S. packaging segment sales still grew nearly 3%, thanks to higher average prices when customers fall short of their volume discount thresholds. This kept segment operating margins roughly flat with the previous year, at 13.3%, after more substantial margin contraction had taken hold over the course of 2017. Outside the United States, operating margins expanded in both segments. In Latin America, this was due to significant cost-cutting measures amid a hyperinflationary environment. Fewer operational issues in healthcare packaging drove rest of world segment operating margins wider as well.
We think both Bemis and Amcor shareholders should have faith in management's ability to recover margins over the next year or two. The combination of the businesses should enable further cost-cutting, with each company adding scale in regions where the other currently lacks it. We continue to believe that Bemis shareholders will get more than their fair share of the pie in the consolidated company, culminating in our $59 fair value estimate.
Bemis is a manufacturer of packaging products. The majority of the company's products are sold to customers in the food industry. The U.S. Packaging segment represents various food, consumer, and industrial products packaging-related manufacturing operations. The Latin America Packaging segment includes various food and non-food packaging-related manufacturing operations located in Latin America. The Rest of World Packaging segment includes various food and non-food packaging-related manufacturing operations located in Europe and Asia-Pacific as well as medical device and pharmaceutical packaging-related manufacturing operations in the U.S., Europe, and Asia.
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