Amcor Profits Hurt By Strong US Dollar

Amcor Limited [ASX:AMC], Australia’s biggest packing company, has fallen short on H1 profits.

Unstable global times have strained many industries. And when consumers stop buying, Amcor suffers. If fewer goods are being bought, less packaging is needed. However, Amcor’s profits didn’t dip because of lacking demand. It’s something on a much larger scale.

Amcor’s H1 net profits dropped by 4.9% from this time last year. Net profits came in at $428.9 million, down $22.9 million from the prior year. Overall revenue didn’t fare much better either. Revenues saw a 5.4% drop, but it wasn’t because of declining demand. It was down to the US dollar.

Since Amcor is a global business, their profits are exposed to exchange rate risk. Many companies try to reduce this risk through hedging strategies. Yet they’re not always successful.  Sometimes, when companies exchange their profits back into Australian dollars, it can affect their total earning figures. And this is exactly what’s happened to Amcor.

In the second half of 2015, the US dollar climbed against the Australian dollar. This decreased Amcor’s net profits in Aussie dollars. Yet despite currency woes, Amcor CEO Ron Delia believes the numbers don’t truly reflect the company’s performance. He believes the business performed strongly, with solid ‘Cash generation…and returns remained above 20%.

Delia notes:

All Amcor business units performed well during the half year. The key drivers of strong earnings growth were higher volumes in both the Rigid Plastics and Tobacco Packaging businesses. There were also benefits from recent acquisitions and continued improvement in operating performance.

If we look at Amcor’s activities, then Delia is hitting the nail on the head. Business has been great, and not just in packaging demand. Amcor has ‘announced or completed six acquisitions in the USA, South Africa, Brazil, China and India.’ This reflects Amcor’s prosperity. It has used takeovers as a method to grow for decades now. And so far it’s working.

Issues may arise using this strategy however. Companies may become too eager to take over any business within their industry. It’s important that acquisitions add value to shareholders; not just debts and assets to the balance sheet.

Amcor’s shareholders have been generally happy with the company’s activities. Bu this morning shareholders were left jumping for joy. Even with the profit decrease, investors seemed to have understood Delia’s comments on currency distortion. Amcor’s shares jumped almost 8% this morning to $13.18 per share.

Amcor feb share price

Source: Google Finance

By the time you read this, it’ll already be old news. What we all really want to know is, will it continue in the future?

Focus on Amcor’s debt

Amcor’s shares haven’t done much since the start of 2016. Even with the share price jump today, the stock is still down more than 2.5% for the year. But does this mean Amcor is cheap?

If I was looking to buy Amcor the first thing I would concern myself with is its debt. Amcor is an aggressive acquirer within their industry. And these takeovers need cash from somewhere. Amcor can either borrow more money, or they can issue more shares.

Amcor recently carried out a US$500 million dollar share buyback. Their aim was to reduce the number of shares within the market. This would then increase the value of their shares, removing the threat of shareholders acquiring controlling stakes within Amcor.

Amcor’s 2015 financial report showed an increase in current debt by US$378.4 million. As did its borrowings. Interest bearing assets, or borrowings, almost doubled from the prior year. Yet that doesn’t seem out of the ordinary for Amcor. They’re a frequent acquirer of companies and therefore have varying amounts of debt.

Debt seems under control, for now, and cash flow generation remains solid. But focusing in on Amcor’s debt, assessing when it becomes excessive could provide opportunities for the savvy investor.

Härje Ronngard,

Junior Analyst, Money Morning

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