Analysis: CCL Industries (CCL-B.TO)

Paraphrased from the 2011 Annual Report, CCL Industries Inc. is a world leader in the development of label solutions for global producers of consumer brands in the home and personal care, healthcare, durable goods, and specialty food and beverage sectors and a specialty supplier of aluminum containers and plastic tubes for the same customers in North America. Founded in 1951, the Company has been public under its current name since 1980. CCL’s corporate office is located in Toronto, Canada, with its operational leadership centres in Framingham, Massachusetts, United States. The company operates in three major operations: Label, Container, and Tube.

  • CCL Label: CCL Label is the world’s largest converter of pressure sensitive and film materials and sells to leading global customers in the consumer, packaging, healthcare and consumer durable segments.
  • CCL Container: CCL Container is a leading North American manufacturer of sustainable aluminum aerosol containers and bottles for premium brands in the home and personal care and food and beverage markets.
  • CCL Tube: CCL Tube produces highly decorated extruded plastic tubes for premium brands in the personal care and cosmetics markets in North America.

When analyzing CCL I came up on some interesting challenges. CCL has two share classes, CCL-A.TO and CCL-B.TO. The Class A shares are voting shares, and receive a dividend that is $0.05 less than the Class B shares. Class A shares are convertible to Class B shares at any time. CCL’s annual statements use the number of Class B shares outstanding to calculate EPS and book value. Because Class A can be converted to Class B at any time, I felt it was more appropriate to use the sum of both classes when calculating ratios. That said, my analysis has focused on the combined total of all Class A and Class B shares, and as such my numbers are slightly off (they are actually lower than those published by CCL in their annual report). In later years (2010 onwards) CCL has listed which portion of net income is attributable to Class A and which portion is attributable to Class B, which allows one to calculate the individual EPS values for each class of share.

That said, let’s take a look at the initial evaluation:

Criteria 2002 2011 Value Threshold Min/Max Pass?
Current Ratio 1.665 1.665 1.5 Min YES
Number of most recent years of positive EPS 10.000 10 3 Min YES
Number of consecutive years of negative EPS 0 1 Max YES
Compound Annual Dividend Growth $0.340 $0.700 7.488% 2.000% Min YES
Compound Annual Share Price Growth $15.980 $30.810 6.785% 3.000% Min YES
Compound Annual EPS Growth $0.654 $2.541 14.532% 3.000% Min YES
P/E 12.126 12.126 15 Max YES
P/BV 1.249 1.249 1.5 Max
P/E × P/BV 24.671 24.671 22.5 Max

Remember that for the P/E, P/BV, and P/E×P/BV values we want both P/E and P/BV to pass, or P/E×P/BV to pass. While the P/E×P/BV test fails, the P/E and P/BV values pass. Given that, CCL passes all of my initial tests. Here are the graphs for the stock:

The above represents the Class B share prices, and year over year, the share price of CCL has gone up steadily. Because CCL focuses on packaging for many of the larger firms that produce consumer goods, they were hit pretty hard with the 2008 financial crisis, which is evident in the share price drop during that period. However, since the fall-off-the-cliff, the company has been back on a steady rise to higher share prices.

The three graphs above illustrate an interesting story. In 2004, 2005, and 2007, CCL discontinued some operations which sent positive shocks to the EPS. When you adjust the EPS for these shocks, it remains at around a respectable $2.00. Notwithstanding EPS, the dividends have been raised consistently for the past decade, with 7.49% compounded annual growth.

Another point to note is the free cash flow. CCL invests a considerable amount of time in capital expenditures year over year. From a dividend standpoint, the ideal scenario is for dividends to be taken out of free cash, since this illustrates that dividends being paid to shareholders are coming directly from cash received from customers — in other words, cash is flowing directly from the customer to the shareholder. Except for 2005 and 2007, this was always the case.

Finally, free cash flow has been on a steady rise since 2005.

And of course, no analysis would be complete without taking a look at the P/E. P/E has remained consistently below 15 since 2003. When you combine this with the Price to Book ratio, and the P/E×P/BV multiple, CCL is very attractively priced.

In my opinion CCL is a great company to invest in. Dividends have been increased at a constant rate, and management has taken actions to eliminate parts of the business which do not add value.

Disclosure: No CCL as of 2012/10/08.


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