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Attractive fundamentals, growth prospects for packaging stocks

CCL's earnings trend is very promising; Intertape looks expensive.

Kirk Paulus 6 March, 2014 | 7:00PM
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Packaging and adhesives companies will never be thought of as trendy. That's not a knock against them, since the quality of labelling and packaging is a major determinant of consumer behaviour and an integral part of the supply chain. More importantly for investors, this often overlooked industry can be a source of appealing stocks with excellent fundamentals and future growth prospects. One such company is CCL Industries Inc. CCL.B.

Analyst revisions for CCL earnings have been trending positively following the closure of the company's Canadian aerosol plant and the consolidation of its manufacturing operations in the U.S. and Mexico. In the fourth quarter of last year, CCL recorded an extremely positive earnings surprise, coming in 118% above consensus. While this level of outperfor­mance is unsustainable, the overall trend in adjusted earnings is exceptionally promising.

Another plus for CCL is its acquisition in the third quarter of Avery Dennison's office and consumer products division. This acquisi­tion was positively received by the market on release of CCL's third-quarter results. While CCL's debt level rose as a result of the acquisition, its balance sheet is still quite stable. The debt-equity ratio is a modest 0.8.

Positive developments at CCL regarding integration and improving operating efficiency in the coming quarters will be major catalysts for the stock this year. After receding from a short-term peak of $86 just before Christmas, CCL has surged to a 52-week high of $94 in recent trading sessions. This latest move in the price was in reaction to CCL beating analysts' earnings targets in its Feb. 20 earnings release. Projected growth in earnings through 2015 indicate that abundant growth opportunities remain.

Specialty labelling, the division involved in package decoration and solutions, is CCL's core business and a major differentiator. With a global customer base consisting of many major international brands such as Dove and Bacardi, CCL is in a strong competitive position with major barriers to entry for new competitors.

Also in the packaging industry, but with a different business model, is Intertape Polymer Group Inc. ITP. With online companies such as Amazon transforming consumer behaviour, demand for parcel and packaging inputs has shown tremendous upside potential.

Intertape is involved in the manufacture of adhesives for industrial and retail use and has seen some great returns over the past two years, breaking out from a $3 stock price to a 52-week high exceeding $15. (Since January 2012, the stock has soared by more than 300%.)

Intertape's fundamentals are still solid, but a lot of the upside appears to already be reflected in the stock price near $13. Nevertheless, analysts remain positive on the stock, which boasts a moderate forward P/E of 9.7 and a strong balance sheet with a debt-equity level of 0.8. Given the success management has had in executing a massive turnaround, Intertape may yet surprise investors with some unexpectedly strong returns.

Positive catalysts for Intertape include the success of restructuring initiatives such as relocation and consolidation of manufacturing facilities over the coming years. Intertape is involved in an industry with positive future demand and has stable adjusted earnings and sales numbers. Intertape remains a viable holding for investors focused on these long-term trends and who believe management can continue performing at a very high level.

However, in comparing Intertape and CCL, the latter seems to be the better investment opportunity because of its solid fundamentals, momentum and a strong growth story. On a key value metric, the advantage clearly goes to CCL. Its current price-to-book ratio (P/B) of 3.1 is only slightly higher than the industry average of 2.95, and much cheaper than Intertape's 4.8. The exceptionally high P/B for Intertape serves as another warning that it may be time to take profits.

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About Author

Kirk Paulus

Kirk Paulus  Kirk Paulus is an equity data analyst with the CPMS division of Morningstar. He holds a Bachelor of Business Administration degree from the Schulich School of Business at York University. He can be reached at kirk.paulus@morningstar.com but cannot provide individual advice.

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