Berry Global Group is an international packaging and protective solutions manufacturer. It was founded in 1967, bought out by Apollo in 2006, and brought public by Apollo in 2012.
It serves a diversified set of end markets including healthcare, food & beverage, and consumer staples. These include companies such as Colgate, CVS Health, Kraft, Pepsi, etc. As it serves as a global provider of a diverse product line, it can benefit from very low costs of manufacturing which will be discussed later. 70% of its sales are in stable consumer-oriented end markets which explains its beta of 0.96. In addition, 51% of its business is in North America, with the remainder in EMEA and ROW.
From an internal point of view, Berry has sustained strong revenue and FCF growth over the past 5 years. This growth is supported by the fact that its average ROIC of 8.9% has consistently been above its WACC of 5.8%. This growth has been fueled through M&A as Berry is constantly acquiring different global businesses to enter new segments or markets (such as the recent RPC acquisition). Through additional M&A, Berry is able to increase its scale, giving it improved bargaining power with suppliers which assists them in keeping manufacturing prices low. This M&A activity has also assisted them in entering new end-markets (AVINTIV and Healthcare) and new geographies.
From an external point of view, the global packaging industry is highly fragmented with singing barriers to entry. The top 5 players which include Amcor, Berry, Sonoco, Sealed Air, and Silgan make up 20% of the market. This fragmentation provides many opportunities for consolidation within the industry. The barriers to entry in the market include economies of scale, sticky international customers such as Unilever that treat their manufacturers as a one-stop-shop for all their packaging needs, and the purchasing power which creates a cost advantage for the larger companies.
There are several tailwinds that benefit Berry and will drive long-term growth. Firstly, the demand for rigid and flexible plastic is greater than that for all-other packaging materials due to its versatility and lightweight. In addition, as Resin costs decrease, the margins in the industry will continue to improve, driving further growth. Moreover, as E-Commerce continues to rise at a CAGR of 17%, the industry will see increased demand given that many of its end markets will see volume increases due to E-Commerce as well.
Investment Thesis 1: Competitive Moat
The market has failed to recognize Berry’s competitive advantage and ability to generate growth, leading to a lower overall valuation than its intrinsic value. There is a prevailing narrative that a high level of fragmentation makes the industry competitive, and in turn product offerings are commoditized and results in margins being squeezed.
While this may apply to other companies, this narrative is incorrect for Berry for two primary reasons. One being its relative scale. Berry is able to maintain its high EBITDA margins through economies of scale, and its EBITDA margins are an average 2% higher than its peers. This is a result of its purchasing power. As one of the largest purchasers of resin, this is significant for Berry overall as resin accounts for ~50% of COGS, with COGS representing 72% of total sales in 2020. Furthermore, the high level of fragmentation provides profitable revenue growth for Berry via tuck-in acquisitions which further allow it to gain market share. It has a history of doing so thus far and has facilitated 50+ acquisitions within the space that have led to greater than anticipated synergies which have resultantly added to Berry’s overall competitive moat.
These acquisitions have also expanded Berry’s global footprint, by enabling them to capture CPG (Consumer Packaged Goods) clients who have international operations and have a preference towards global suppliers. The most prominent recent acquisition of RPC gave Berry access to the EMEAI geography, which further helped strengthen its global presence.
Furthermore, Berry has a history of accretive activity contributable to its strong management and M&A team. This has enabled Berry to acquire other businesses at favorable prices while successfully integrating them to generate strong returns. Its past 15 acquisitions resulted in an average ~5.2x post synergy EBITDA which is much higher than industry standards. Lastly, even some of its closest peers like Amcor often overpay for acquisitions, where Berry has always paid favorable prices that result in profound inorganic growth for the company.
Thesis 2: Debt Reduction
Moreover, as Berry continues to reduce its debt, it will generate equity value creation and expand company multiples. Berry’s high leverage, currently 4.1x, has created a market inefficiency in its name as investors are either restricted from owning it or if not, have a systematic bias towards it. The market has missed Berry’s path to de-lever as it has publicly committed to reducing leverage to ~3.8x by FYE 2021. This is definitely achievable and Berry’s 8% FCF margin can support its commitment to de-lever.
As Berry pays down debt, two primary things will occur. First, the value will accrue to equity holders, and second, there will be an overall increase in the number of investors interested in Berry, thereby increasing its multiples. These will make Berry more attractive to both retail and equity investors. Furthermore, there is also strong potential for Berry’s inclusion in the S&P 400 index as leverage has been a contributing factor to its lack of inclusion as well as scope for active long funds to buy Berry. This would also resultantly drive incremental passive flows into Berry.
Also, historically Berry has traded between 9.0x – 8.0x EV/NTM EBITDA when its leverage has been ~4.0x, which is a premium to where the stock is trading at today with ~7.3x 2021 EBITDA. This further implies that Berry’s multiples can expand if it continues to reduce leverage. Its close peer AMCOR is being valued by the market at ~4x EBITDA premium to BERY in large part due to a less leveraged capital structure.
Thesis 3: Plastic Misconception
Lastly, Wall Street has a misconception on plastic and how quickly it will phase out, leading to an overwhelming negative sentiment for companies that supply such products. The global use of plastic and its overall trend is positive, and by 2025 plastic packaging is expected to increase even beyond current levels.
Plastics create a lower environmental footprint than other comparable substrates as it uses less energy and water and generates less greenhouse-gas emissions and solid waste. However, because plastics are inexpensive, there is a post-consumer waste problem because recycling is not as economically viable. As a result, most plastic ends up being in a landfill as opposed to being recycled. Governments have realized this and focused their attention on banning single-use plastics, which Berry does not have exposure to, and have increased the use of recycled plastics. Berry is well prepared for this as a founding member of the Alliance to End Plastic Waste, where Berry works with policymakers, NGOs, and local communities to build waste systems to increase recycling and work on product designs that facilitate the recycling of plastics. This is shown through its recent R&D and product development initiatives such as soft-flex and booster spray, where it uses more sustainable and environmentally friendly products in its production process. Overall Berry has been misvalued by the market and is on a trajectory for an upward correction as the market's beliefs change.
Valuation: Comparable Companies
From a comparables perspective, the median EV/EBITDA and P/E multiples for Berry’s pers are significantly higher than Berry’s indicating that Berry is trading at a significant discount. This is especially interesting when looking at competitors Amcor and AptarGroup, which have similar ROIC and yet lower revenue growth than Berry but are still trading at higher multiples.
Overall the market is clearly missing Berry’s potential to be a leader in the global packaging industry and there is great potential for appreciation of the stock. This is definitely a stock to delve deeper into and value as there is significant room for growth.