EVA Focus: CCL Industries (CCL/B)

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This week we will discuss a Canadian large cap that quietly became the undisputed leader of the label making industry: CCL Industries. The company has been growing at an incredible rate through organic growth and acquisitions. We bought shares of CCL/B on June 30th, 2017 and the shares are up 8.7% YTD. In the following report, we will re-assess the company based on the metrics we follow.

Q2 2018 Earnings Results

On August 9th, CCL/B reported an EPS of C$0.60 (vs. C$0.57 expected) on revenues of C$1,483.7 million (vs. C$1,469.4 million expected). Shares fell -4.5% after the announcement as the results are in-line. The improved EBIT from the CCL and Checkpoint segment compensated the weaker than expected EBIT from the Avery and Innovia segment. The CEO reaffirmed his guidance for H2 2018.

Competitive Advantage

CCL/B is the world’s largest label maker and employs more than 20,000 people operating in over 165 production facilities in 40 countries and has its headquarters in Toronto, Ontario. Based on Revenues, it controls 70% of the sales of the industry while the other 30% is split among smaller competitors. Due to its unique positioning and high brand awareness, the company benefits from strong bargaining power to both its suppliers and clients. Since most of its sales are exports in countries that have stronger currencies, CCL/B is reaping benefits from the weak loonie which is boosting revenue growth.

A Quality Company

Its SPscore of 70% makes CCL/B the second highest rated stock behind West Fraser Timber (WFT) in the materials sector. If we look at its peers in the industry, it is the company with the best SP Performance metrics (86%) in relation to its Risk metrics (35%) as seen on the chart below. The Return on Capital is at 13.6% and has declined over the last three years from a high of 29%. However, this is not too worrisome considering the company has been on a mission to repay a portion of its debt.

The NOPAT grew at an impressive rate of 29% over the last five years except in the last year due to its relatively large acquisition of Innovia for $1.13 billion that caused a NOPAT decline from its previous year while the invested capital grew from $4.4 billion to $5.8 billion. In the future, we believe CCL/B will continue to benefit from organic growth and growth from smaller acquisitions.

CCL/B’s accounting performance is robust.  Revenues and earnings per share grew at a fast pace of 15.3% and 27.1% CAGR respectively over the past 5 years as the growth strategy proved to be successful. To reward investors, CCL/B increased its dividend, at an average rate of 20.8% per year. The dividend yield is projected to be 0.82% in the next 12 months, similar as the previous two years.

The payout ratio is low at 16.6% as the management still find opportunities to invest its cash flows rather than give them back. This is reflected by the couple of acquisitions done over the last years which increased the debt to equity ratio to 1.2, above the industry’s average of 0.9. The gross and net margins are both at their highest levels ever and there’s no sign of upcoming margin compression yet.

At A Fair Price

When it comes to valuation, the stock is currently trading well below its intrinsic value, at a 0.51 P/IV ratio, reflecting a potential upside of close to 96%. The current discount is even more interesting considering that the stock hasn’t traded at this valuation level in the last five years which makes it an attractive level. If the stock materializes just a fraction of this upside, we can expect the stock price to clear its 52 Week high of C$67.50, a resistance level tested three times in the last 15 months.

However, the Future Growth Value (FGV) of 5% tells us the enterprise value is almost equal to its operating value, so the discount is minimal according to that measure. Traditional ratios also suggest the stock is overvalued to its peers: the price-to-earnings is at 22.8 (vs. 16.4 for the industry), the price-to-sales is at 2.3 (vs. 1.4 for the industry) and the price-to-book is at 4.8 (vs. 2.9 for the industry).


CCL/B is a quality company with top quartile metrics but when it comes to valuation, we believe the stock may be slightly overvalued despite its low P/IV ratio. However, the company is worth holding because it is well positioned to grow in all its segments and materialize synergies with its acquisitions.

A great way to invest your client’s money in CCL/B along with other 24 quality Canadian companies is to purchase the Horizons Inovestor Canadian Equity ETF (INOC). The ETF is holding CCL/B since its inception. For more information on INOC, please click here to visit Horizons ETF website.