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Berry Plastics Corporation (NYSE:BERY) $14.99. Price target $22-37 (up 45-145%) December 13, 2012.

Stock Characteristics

Synopsis:

  • Berry was an overlooked IPO from October 2012, priced at lower end of range ($16-18 range) and traded down immediately.
  • Management personally bought stock on the IPO at $16.
  • Berry sells plastic consumer packaging. It has a leading market share and generates significant cash flows. It is a slow grower: Management expects its top line to grow faster than the industry, which grows similar to GDP rates.
  • Highly levered cash cow business, with very low valuation based on cash flow multiple. While top line only shows small 2% type growth, I expect the Free Cash Flow line to grow in the 10%+ area as Berry pays down debt and reduces interest expense.
  • I believe the stock has 45-145% upside, simply based on achieving a cash flow multiple similar to peers.

Basic Financial Model

  • The basic model below shows how I expect Berry to pay down its debt going forward.
  • Berry has roughly $900 million in NOL's.

(click to enlarge)

Valuation

  • I focus on the Free Cash Flow multiple for companies such as Berry. Given that Berry will be paying down its debt, I specifically look at an EV/FCF (pre interest expense). I believe this creates a more apples to apples comparison vs. other companies with different capital stuctures. Utilizing a 11-14x EV/FCF (pre int. exp) multiple, I generate a price target of $22-37 (up 45-145%).

  • Alternatively, you can look at basic FCF multiples out several years after much of the debt has been paid down (as seen below). Below is a straightforward EV/FCF valuation.

(click to enlarge)

Comps

  • Primary competitors include Airlite, Letica, Polytainers, Silgan, Aptar Group and Reynolds, but Berry is the only big one that does both rigid and flexible packaging, making Berry an easy solution for one-stop shopping.
  • Publicly traded comps comparison (below) shows that BERY is relatively inexpensive at current prices across most metrics, despite having better margins.

(click to enlarge)

Background

  • Berry manufactures and sells plastic consumer packaging. Berry owns a library of molds, patents, manufacturing techniques and technologies.
  • Roughly 90% of sales are U.S. / international.
  • Over 76% of sales in stable, consumer oriented end markets, and longstanding relationships with leading companies.

(click to enlarge)

  • Product types can be broken down as follows (along with the portion of EBITDA generated by each)

  • In March 2006, Apollo Global Management and Graham Partners acquired the firm.

Be Aware Of

  • Apollo Management owns roughly 50% of the outstanding shares.
  • Resin prices fluctuate, which can pass through the income statement, altering margins.

(click to enlarge)

Disclaimer

Disclosure: The author or funds he manages currently has a long position in BERY.

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Source: Overlooked Berry Plastics Offers Strong Cash Flows And Low Valuation

Additional disclosure: The author manages capital that has an investment in BERY. The content of the article is only an expression of the author's opinion, and the author cannot confirm the completeness or accuracy of the information and data within. Please see full disclosure at end of article.