AptarGroup: There Is A Lot Of Room For Growth
Summary
- Net sales increased over the years thanks to steady acquisitions. Growth has slowed during the second half of 2021 but accelerated again during the first quarter of 2022.
- The company has high exposure in Europe, leading the price to fall by 27% due to the Ukrainian war.
- Debt has increased in recent years, which will limit future growth.
- The dividend cash payout ratio is very low, allowing the company high capital expenditures and acquisitions.
- This is a buy-and-hold for the long-run company.
Zolotaosen/iStock via Getty Images
Investment thesis
AptarGroup's (NYSE:ATR) growth has slowed over the second half of 2021. Still, net sales increased by 8.78% year over year during the first quarter of 2022 while profit margins are high and stable, and the company is generating enough cash from operations to cover the dividend and interest expenses with only 25% of the cash generated, which leaves a lot of room for growth, but such growth will likely remain slow in the medium term as the company's cash reserves have almost been depleted while the long-term debt remains at similar levels from the CSP Technologies acquisition in 2018.
The company has high exposure in Europe, leading its share price to fall by 27% due to the Ukrainian war as more than half of the company's net sales came from Europe in 2021. It has increased net sales over years thanks to an aggressive M&A strategy and high capital expenditures and generates enough cash to keep growing, but increasing CapEx is eating up all resources for now. The recent acquisition of Voluntis opens the door to a new industry for the company: medical software. The company had been dedicated to physical support until now, so this acquisition opens a new era in AptarGroup.
In 2021, the company began to buy back shares again after over five years of pause, albeit at a very low rate. Still, the management stated that it intends to keep buying back shares in the future. For now, strong capital expenditures on recently acquired companies are more important in order to squeeze their full potential, but investors should expect strong buybacks as soon as the company fully digests all recent acquisitions.
A brief overview of the company
AptarGroup is a global designer and manufacturer of drug delivery, consumer product dispensing, and active material science solutions and services for some industries, including pharmaceutical, beauty, personal care, home care, and food and beverage. Recently, the company entered the medical software industry by acquiring Voluntis, an industry that still has many areas to explore. AptarGroup was founded in 1992 and its market cap currently stands at ~$7.5 billion, employing around 13,000 people worldwide.
Aptar's portfolio of products (March 2022 Investor Relations Presentation)
The company's operations are divided into three main segments: Pharma, which accounted for 40% of the company's total net sales in 2021, Beauty + Home, which provided 44% of total net sales, and Food + Beverage, whose net sales were 16% from the company's total. AptarGroup manufactures a wide range of packaging components solutions, including inhalers, nasal vaccines, needle shields, drug blisters, applicators and droppers, lipsticks, tubes, spray pumps, valves, and much more. It generates revenue from repeating sales in critical industries and pays a small portion of cash as dividends, making it a good option for conservative investors.
Currently, shares are trading at $115.04, which represents a 26.99% decline from all-time highs of $157.56 on May 7, 2021. This recent drop in the share price, which is already below pre-covid levels, reflects the uncertainties in Europe related to the Ukrainian war over the past few quarters, but estimates of $3.39 billion for 2022 and $3.54 billion in 2023 are significantly higher than net sales in 2021, which were $3.23 billion, for which the company is expected to keep growing despite headwinds related to the war. Furthermore, margins keep stable, so I believe this represents a good opportunity to acquire shares at a reasonable discount.
Recent acquisitions
Over the years, AptarGroup has grown through the continuous acquisition of specialty packaging companies for manufacturers in the medical, beauty, and food sectors.
In August 2018, the company acquired CSP Technologies, a manufacturer of packaging solutions for drugs, drug delivery, dermal drugs, supplements, medical devices and implants, diagnostics, and food protection, for $553.5 million. This major acquisition increased the company's net debt significantly, which is why the management has been more cautious with further acquisitions in order to maintain a stable debt level.
In May and June 2019, the company acquired Gateway Analytical and Nanopharm, two leading pharmaceutical services companies that offer analytical, testing, and development services for all stages of drug development and commercialization, for $10 million and $38.1 million, respectively. Later, in August 2019, the company acquired Bapco Closures for $3.8 million and invested $3.5 in Loop and PureCycle Technologies.
In October 2019, the company acquired Noble, a leading company in drug delivery training devices, including autoinjectors, prefilled syringes, on-body and respiratory devices, and patient onboarding for $62.3 million. During the same month, it also agreed to acquire 49% of BTY, which consists of three Chinese manufacturers of high-quality color cosmetics packaging solutions for the beauty market.
In April 2020, the company acquired FusionPKG, a manufacturer of high-quality cosmetics packaging products for the North American beauty market, for $163.8 million. Later during the same year, in October 2020, it acquired Cohero Health, a digital technology company focused on solutions for Asthma and COPD management, for $2.4 million.
In July 2021, the company acquired a 10% stake in YAT, a Chinese online skincare solutions company, for $5.9 million, and partnered with it in order to develop and manufacture products and services for the skincare market. Later, in August 2021, it acquired 80% of Weihai Hengyu Medical Products Co., Ltd., a leading Chinese manufacturer of elastomeric and plastic components used in injectable drug delivery, for $53.8 million.
And lastly, in September and November of 2021, the company acquired Voluntis, a French company that designs digital therapeutics for people with chronic conditions, for $89.7 million.
Net sales keep growing
Acquisitions have allowed the company to increase its net sales over the years in a more or less steady way. During 2020, the company reported a net sales increase of 2.43%, and the growth accelerated during 2021 as the company reported a 10.17% increase.
AptarGroup net sales (10-K filings)
During the last quarter of 2021, net sales increased by 8.63% year over year, and they increased again by 8.78% during the first quarter of 2022, so growth remains stable so far. In 2021, the company expanded its premium coated elastomeric components' production capacity, set aside €60 million to increase the production capacity of components for injectable medication, was awarded a €19 million contract from the U.S government to expand the capacity of the company's Activ-Film technology, was awarded a €13 million grant from the government of France to keep expanding in Europe, and built a new manufacturing facility in Mumbai.
Also in 2021, Perrigo (PRGO) announced a generic version of a leading nasal spray for treating migraine headaches with AptarGroup's unidose nasal device. Teva (TEVA) will also use the company's unidose nasal device for the first U.S. generic version of Naloxone Hydrochloride. Sandoz and Glenmark are also starting to use the company's unidose nasal device. Net sales from the company's active material science solutions increased by 50% led by the company's Activ-Film technology, which enhances the integrity of in-home COVID-19 test kits, so the company has an opportunity to capitalize on the coronavirus pandemic in the future.
The PS ratio currently stands at 2.355, which means the company generates $0.42 in net sales for each dollar held in shares, annually. This ratio is high due to the company's high profit margins, as it operates in a highly specialized market, and much higher than the historical average, so further price declines could take place in the medium term, making averaging down a wise option.
The company's net sales are widely spread over the world as 34% of net sales were provided by operations within the United States, whereas 53% took place in Europe and 13% in the rest of the world. The latest acquisitions suggest that the management is determined to continue expanding in China, where the company has plenty of room to grow.
Margins are high and stable
The company's margins are very high, which allows strong cash generation. These margins have increased over the last decade thanks to the acquisition of highly specialized companies in specific sectors.
In 2021, margins weakened due to inflationary pressures, especially related to the increased cost of energy in Europe. The increase in the cost of resin has had a significant impact on the margins of the Food + Beverage segment since it has doubled. Still, margins remain very stable as the company reported gross profit margins of 35.77% during the last quarter and EBITDA margins of 18.25%.
In June 2021, the company increased the price of all products of the Beauty + Home division by 5%, in addition to further price adjustments due to inflationary pressures, which has allowed it to maintain margins at healthy levels. The company also built a new facility in Suzhou, China, to concentrate all Suzhou operations in a single building, which includes state-of-the-art machinery and automation systems in order to keep high profitability.
The company's debt will limit future growth
Long-term debt significantly increased after the acquisition of CSP Technologies, and the management has tried to reduce its cash on hand during subsequent acquisitions in order to reduce debt exposure.
Still, long-term debt increased to $1.5 billion during the last quarter as the management is raising cash again. Net debt has also increased to slightly over $1 billion, suggesting that the current pace of acquisitions cannot be sustained in the long term without an increase in long-term debt, which consumed $30 million in interest expenses in 2021.
The dividend is very safe
The company has increased its dividend steadily over the years. In this sense, the dividend more than doubled during the last 10 years, which represents a very generous increase if we take into account that the company maintains very low payout ratios.
The current fall in the share price has caused a rise in the dividend yield to 1.32%, although this is still at a relatively low level if we take into account the yield offered during the past 10 years.
Next, I present a table where I analyze the company's ability to cover the dividend and interest expenses through its cash from operating activities, since in this way we can determine its ability to pay them through cash from actual operations.
| Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 |
| Cash from operations (in millions) | $286.10 | $316.33 | $324.52 | $325.30 | $324.73 | $313.63 | $514.46 | $570.15 | $363.44 |
| Dividends paid (in millions) | $66.13 | $71.07 | $71.25 | $76.66 | $79.94 | $82.35 | $90.21 | $92.66 | $98.51 |
| Interest expense (in millions) | $20.51 | $21.03 | $34.62 | $35.24 | $40.60 | $32.63 | $35.49 | $33.24 | $30.28 |
| Cash payout ratio | 30% | 29% | 33% | 34% | 37% | 37% | 24% | 22% | 35% |
As we can see, the cash payout ratio has remained very low over the years, which has allowed the continuous expansion of the company through acquisitions and expansions of production capacities. The management has also used some cash to buy back shares in the 2005-2015 period.
During the first quarter of 2022, the company generated ~$92.1 million of cash from operations. Furthermore, inventories increased by $18.1 million and accounts receivables by $22.9 million. Also, total current liabilities declined by $121 million.
The company is a historical buybacker
Until 2015, the company repurchased its own shares to remove them from the market, thus making each share represent a larger and larger portion of the company, thus improving per-share metrics.
In April 2019, the company announced a new $350 million share repurchase program, which finally failed to take place as the number of outstanding shares has actually increased since then. Still, the company repurchased over 600,000 shares in 2021, and CEO Stephan Tanda stated during the Q4 2021 earnings call that it intends to keep repurchasing more shares over time.
Until now, excess cash has been used to increase the company's CapEx. This has made it possible to optimize the operations of the acquired companies, which is why I believe management has made good use of the cash generated.
Still, high profit margins and low cash payout ratios give the company the possibility of continuing to buy back shares in the long term once the long-term debt is considerably reduced.
Risks worth mentioning
The surge in long-term debt points out that AptarGroup's growth is unsustainable in the long term at the rates at which it has been doing so. The company's debt is currently generating $30 million in annual interest expenses, which will limit the company's growth capabilities. If acquisitions continue at the same pace, there could come a time when reducing debt levels becomes a necessity before growth can continue. This is not necessarily a bad thing as companies go through different phases over the years, but it is important to keep in mind that the growth of AptarGroup during the last decade will be difficult to replicate at the same speed during the next few years.
Also, the PS ratio is very high compared to the past despite the recent dip. This is because sales growth is relatively fast while profit margins are very high. The share price could continue to decline as soon as the company reports one or more poor quarterly results, so I think investors should save a bullet to buy more shares at lower prices if the opportunity arises.
Conclusion
AptarGroup's high exposure in Europe has caused a drop in the share price as a result of the war in Ukraine. This presents an opportunity to buy shares at a reasonable discount of more than 25% from all-time highs for those conservative investors with a long-term view.
The company generates revenues from repeating sales for critical industries. The dividend yield is low, but cash payout ratios are also very low thanks to strong cash generation. The debt is very manageable despite the recent surge, margins are high and stable despite high energy costs in Europe, and net sales are steadily increasing year after year.
The company has historically performed aggressive buybacks and has the potential to continue to do so in the future. For now, the cash generated is being used to continue growing through acquisitions and strong capital expenditures, but once the company's growth strategy reaches an advanced level, investors should expect further buybacks, which will increase the portion of the company that each share represents over time.
For all these reasons, I strongly believe this is a buy and hold for the long-term company, but that investors should save a bullet in order to average down in case the price continues to drop because the PS ratio is quite high.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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