Bloomberg News

Beer Label Maker Flies Under Radar to Top TSX: Corporate Canada

March 22, 2013

CCL Tops TSX on Heineken Labels and Dealmaking

CCL Industries Inc. has more room to rise after the maker of Heineken beer lables and Tide detergent bottles posted the second/best return among Canadian stocks this year. Photographer: Simon Dawson/Bloomberg

CCL Industries Inc. (CCL/B) has more room to rise after the maker of Heineken beer labels and Tide detergent bottles posted the best return among Canadian stocks this year.

CCL, the world’s largest maker of specialty labeling, has surged 40 percent in 2013, the best among 239 members in the benchmark Standard & Poor’s/TSX Composite Index as of yesterday.

“This industry is very fragmented and these guys are the 300-pound gorilla,” said Luciano Orengo, a fund manager with Manulife Asset Management Ltd. in Toronto, who helps manage about C$1.4 billion ($1.37 billion) including CCL shares.

The 62-year-old company is benefiting from acquisitions and a strengthening balance sheet which have helped its shares double in the last two years, said Ben Jekic, an analyst with Industrial Alliance Securities, based in Toronto. The company’s total debt has decreased in each of the past four years, to C$329 million at the end of 2012 from C$592.5 million in 2008, according to data compiled by Bloomberg.

CCL agreed in January to acquire two units of Pasadena, California-based Avery Dennison Corp. for $500 million in cash. An earlier $550 million deal between Avery Dennison and 3M Co. fell apart due to U.S. competition concerns.

“The acquisition is a transformational deal for the company,” said Mark Neville, an analyst with Scotia Capital Markets, in a note to clients on the day the deal was announced. “It significantly moves the needle, potentially moving the company’s top line past C$2 billion.”

CCL reported revenue of C$1.31 billion in 2012.

Shares of CCL will jump 13 percent to C$68 over the next 12 months, according to the average price target of three analysts surveyed by Bloomberg.

Office Supplies

The two units, which produce office-supply products and labels, had combined revenue of about $910 million and adjusted earnings before interest, taxes, depreciation and amortization of $110 million in 2012. CCL had ebitda of C$254.6 million in 2012, and has a market value of C$2.05 billion.

With the acquisition, CCL will get increased access to office-supply markets in North America as well as in durable goods, which includes labels for autos and electronics, said Stephen MacLeod, an analyst with BMO Capital Markets.

“This is a stock that has flown under people’s radar,” MacLeod said on the phone from Toronto. “It has a strong presence as the largest label converter globally.”

The Willowdale, Ontario-based company produces custom packaging for Procter & Gamble Co., Unilever NV, Heineken NV (HEIA), Pfizer Inc. and L’Oreal SA in 74 facilities around the world. Products include pressure-sensitive labels for beer bottles, aluminum aerosol spray cans for hair products, as well as labels on prescription pill bottles.

CFL Player

The company, formed in 1951 by Gordon Lang, has 6,600 employees around the world. Donald Lang, son of the founder, is a former CEO and remains executive chairman. He and his brother, Stuart Lang, a former player with the Edmonton Eskimos of the Canadian Football League, control the company through ownership of about 94 percent of CCL’s Class A voting stock, according to Bloomberg data.

Still, some investors say the stock may be overvalued after the recent rally.

“This stock has gotten ahead of itself, a lot of expectations have been priced in, so I’d avoid it,” Barry Schwartz, fund manager with Baskin Financial Services, said from Toronto. Schwartz helps manage about C$500 million and doesn’t hold CCL shares. “The earnings won’t be here today, they’ll be here in two years, so it’s hard to see it go materially higher until the deal closes.”

High Multiple

CCL’s price to earnings ratio of 21.2 is almost double that of its closest competitor, Batavia, Ohio-based Multi-Color Corp. (LABL:US), at 13.2 times earnings.

“It’s trading at a ridiculous multiple,” Schwartz said.

The company’s fourth-quarter adjusted earnings of 59 cents a share missed analysts’ estimates of 60 cents. This was due in part to a loss of 4 cents a share because of currency translation, Neville said. The company conducts 95 percent of its business outside Canada.

With the Avery Dennison deal, CCL holds about 4 percent of global market share, giving the company ample room for continued growth and consolidation, Industrial Alliance’s Jekic said.

Market Share

“Longer term, I could see that number doubling, they could pursue further acquisitions,” although CCL will need time to integrate the Avery units, Jekic said. “They have a very prudent strategy and a lot of relationships with very large multinational companies. When they decide to move into an emerging market, CCL follows them in.”

CCL has footholds in markets including China, Thailand, Vietnam, Russia and Brazil. The rest of South America is an opportunity for further expansion, BMO’s MacLeod said.

Geoffrey Martin, CCL’s chief executive officer, was unavailable for comment because he’s traveling in South America, said Sean Washchuk, the chief financial officer.

“We do still have other tuck-in acquisitions in the pipeline,” Martin said on a conference call on Feb. 21.

Baskin’s Schwartz described CCL as a recession-proof business, making labels for home and health-care products that consumers need. CCL is well-positioned to consolidate the industry in the midst of a global economic recovery.

“It’s a stock I should’ve bought a few months ago,” Schwartz said.

To contact the reporter on this story: Eric Lam in Toronto at elam87@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net


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Companies Mentioned

  • LABL
    (Multi-Color Corp)
    • $44.25 USD
    • -1.23
    • -2.78%
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