CCL Industries
A quick overview of a recent purchase and a negativity test for value stocks
As always, this is not intended as investment advice. Please do your own research.
CCL Industries ($CCL.B on the TSX) is a classic “boring", behind the scenes company. It is the market share leader within the label making business - an everyday necessity which can be easily overlooked.
Despite being a fairly large company with a global footprint and blue-chip customer base (see below from the company's recent investor day presentation), the company doesn't seem to get that much attention; here Ernest Wong of Baskin Wealth comments that he was the only attendee who wasn't on the Board at one of CCL's previous annual investor meetings.
The company has both voting (A) and non-voting (B) shares. The Lang family, through 1281228 Ontario, Inc. Investments, holds ~95% of the voting shares, plus a similar amount of non-voting shares, combining for nearly 25M of the 177.75M shares (14%). In addition, Donald Lang (Chair of Board and former CEO) owns 0.53% of the company in B shares, Erin Lang (a director) owns 0.53% as well, and Stuart Lang owns 0.36%.
Despite being a 10B CAD market cap - a large cap by Canada standards, being one of the smaller holdings in the TSX 60 - CCL is not particularly liquid. With a free float of ~83% and 250,000 shares being a normal day of trading volume, an institution would need to be running maybe 1 or 2B CAD if they wanted to initiate/exit a 2.5% weighting in the stock in a timely manner, though many managers in the space have more AUM than that.
Geoffrey Martin took over from Donald Lang as President and CEO in 2008, after having joined the company in 2001.
From 2008- 2012 not much was done in terms of acquisitions, the company paid down some debt, and the stock went nowhere - dropping from $7.50 to low $4's, then gradually recovering as the company's CF's bottomed in 2009 (down 15% from 2007 levels) with CFs making a full recovery by 2011.
But then CCL acquired Avery in 2013 and Checkpoint in 2016. These were large acquisitions for CCL at the time (~500M apiece), and have been great successes: both Avery and Checkpoint have doubled their EBITDA since being acquired, despite more modest revenue growth (though there have been smaller bolt-on acquisitions to these segments helping contribute). These acquisitions provided the company much greater ROI's than what the company had been earning investing in its business via CAPEX. Again, Ernest Wong has a nice blog entry from 2018 illustrating the returns earned on these investments that is worth checking out.
With the stock trading at <7x CF in late 2012 and going into a period of strong CFps growth - revenues tripled from 2012 to 2016, sharecount only increased ~4%, and Net Debt/Cash Flow staying under 2x - the stock was a home run, rising from $7.50 to $58 in the spring of 2017, or ~18x trailing CF. The significant multiple expansion being a good example of how while market prices reflect future expectations, expectations are often anchored in experiences (especially if long-lived), and high (low) multiples tend to follow sustained periods of high (low) growth.
However, in the 7+ years that have followed the company's share price is flat, and dividends haven’t exactly moved the needle, underperforming the broader Canadian market.
In the first quarter of 2017 the company acquired Innovia for 1.13B - by far its biggest acquisition. The EBITDA multiple paid for Innovia was a bit higher than Avery and Checkpoint but not alarmingly so. Though that purchase multiple was on expected 2017 Revenues and EBITDA of 570M and 155M, respectively, which ultimately did not come to materialize. In December 2023, the company announced it was closing Innovia's Belgium operations and recording a 120M impairment charge to Innovia.
The less stellar outcome from the large acquisition of Innovia has dampened CCL's returns on capital employed since 2017, such that despite primarily reinvesting its cash flows into the business (about 15% paid out in dividends), growth in CFps since 2017 has only been 6.75%.
When investors pay 18x CF for a stock, they expect CFps growth in the double digits. The realized growth shortfall vs expectations has resulted in CCL's stock experiencing significant multiple compression, going from ~18x to ~10x CF today, offsetting the gains from CFps growth in the interim.
Net Debt/EBITDA is at 1.3x, at the low end of the 1-3.5x guideposts, suggesting the Balance Sheet can be flexed for acquisition opportunities, or perhaps buybacks. At 10x CF and a conservative balance sheet, could CCL one day become a share cannibal? Generally speaking, such companies have:
Durable, non-declining CF generation
Ability to flex a large balance sheet
Trade at a low multiple of CF
Modest (or no) dividend obligation
Buybacks have been sparse historically, with the company spending 200M in H1 2022 buying back ~3.4M shares at average price of $58.95. Management has alluded to buying back shares when leverage is at the low end of its guideposts or its shares are viewed as being undervalued. On paper, CCL does seem to be a candidate to greatly reduce its sharecount, though I wouldn't bet on it as past capital allocation and comments by management at its recent investor day suggest growth via acquisitions is likely to continue, as opposed to a big shift towards share repurchases. This is supported by the company's recent flurry of small acquisitions at multiples of ~6x EBITDA over the past two quarters combining for >300M.
Presently, the forward dividend yield on CCL is ~2%, with a Cash Flow1 yield of ~10%. With a low dividend payout ratio, room on its balance sheet, I think CCL can grow its CFps at 8-10% going forward. I don't think this is overly aggressive; as it implies investing 80%+ of cash flow in Capex, acquisitions and buybacks at a 10% CROCE, which is all in alignment with historical CROCE, buybacks at the current share price, and the dividend payout ratio. As noted, the company's balance sheet is reasonably levered, providing the option to invest greater sums than what it generates in cash flow, which could help push CFps growth towards 10%, or perhaps even above 10% if some acquisitions are made that end up being successes closer in magnitude to that of Avery and Checkpoint.
Note: while management isn't particularly promotional and doesn't provide guidance, they have alluded to >GDP level organic sales growth and the possibility of becoming a 10B revenue coming over the medium term (~5 years). I think this is supportive of my growth estimates.
Along the way, the dividend can grow in-line with CFps growth, and the payout ratio could eventually be increased as the company matures given it is not a super capital intensive business: I don't think it is out of the question that CCL have a dividend of $5.50 within 10 years (~10% yield on cost).
Apart from broad market declines in Q4 2018 and early 2020, ~$53 has served as a level of support for the stock, which is only down 7% from the current $57 share price. I think the stock is quite attractively valued today - though not alarmingly cheap - and initiated a position in the stock very recently, making it a 5% weight as I continue to do some work on the company while crossing my fingers that it gets to $45. This post is admittedly light on detailing CCL's business and what makes it a good business - perhaps something for a future post as it is something I continue to investigate, but so far I like what I've seen, and it seems like a well-run company with a durable stream of revenues and good margins.
While I’d like to buy more shares at a lower price, I'm not holding my breath for the stock to fall below 10x CF (or $53). Below is a rough checklist of traits I find to be associated with companies that rightfully trade at below 10x (normalized) Cash Flow. I think we can reject this list for CCL, and that the company's shares deserve to trade at 10x CF (or a bit more).
Negativity Test for Value Stocks:
Capital intensive + low (<10%) cash returns on capital employed
Low margins + lack of pricing power
Overly cyclical (including commodity-linked revenues)
Too much debt
Melting ice cube
Poor capital allocation
When referring to Cash Flow, I am using the definition of Operating Cash Flow prior to working capital adjustments, less SBC, less Capital Lease Payments.