Berry Global: Trading At 7 Times Earnings And A 17% FCF Yield (NYSE:BERY)

The various type of plastic bottles with injection mold background.

Phuchit/iStock via Getty Images

Introduction

Most of you know by now I mainly focus on the ability of a company to generate a positive free cash flow before considering making an investment. While income statements are useful, I’m more interested in how the paper profits are effectively converted into dollars hitting the bank account. Berry Global (NYSE:BERY) is a large packaging company generating very strong free cash flows making it cheaper than some of its peers like Amcor (AMCR) which I discussed in another article. Despite the lower valuation, Berry Global is still often forgotten by the investment community despite its status as a cash flow generator.

Chart
Data by YCharts

Berry is a real cash flow machine

Berry’s financial year ends at the end of this month, which means the most recent financial statements available to the investment community are the Q3 results, which provide an overview of how the company performed in the first nine months of its financial year.

The total revenue in these first three quarters increased by almost 9% to just under $11.1B, which allowed Berry to report an operating income of $906M. It’s clear the company is feeling the impact from decreasing margins, as the operating income decreased by almost 8% compared to the first nine months of the previous financial year, despite recording lower restructuring and transaction activities.

Income Statement

Berry Global Investor Relations

The net income in the first three quarters came in at $4.02 per share which is an increase compared to the same period last year thanks to lower finance expenses, lower other expenses and a lower average tax rate. This helped Berry’s bottom line to show a 6% increase in the net income, and as Berry has been buying back stock, the share count decreased, causing the EPS to increase by almost 7%.

And as you can see above, the third quarter was pretty strong with a reported net income of $207M which resulted in an EPS of $1.61 per share. A strong third quarter, which helped to boost the 9M 2022 results.

Looking at the cash flow result, Berry disclosed a total operating cash flow of $345M, which included an $800M investment in the working capital position. A quick glance at the balance sheet mainly shows a $533M reduction in the accounts payable and an additional $76 decrease in the accrued employee costs while there was a small increase in the total amount of receivables and inventories. The total operating cash flow was approximately $1.2B after isolating the changes in the working capital position and adding back the total amount of deferred taxes paid.

Cash Flow Statement

Berry Global Investor Relations

After deducting the $556M in capex, the adjusted operating cash flow was approximately $650M, although we should likely also still deduct some lease payments which are likely included in the “net cash from financing activities.” As Berry lists about $100M in near-term lease debt, it’s safe to assume lease payments are about $25M per quarter.

The economic crisis obviously has an impact

As you can see below, Berry Global has an excellent history of growing its revenue, EBITDA, EPS and FCF by double-digit percentages.

EBITDA Evolution

Berry Global Investor Relations

This obviously requires an effort, and the current inflationary environment may result in an abrupt end of this trend. We already know how Berry Global performed in the first three quarters of the year, so even if its final quarter would be bad, FY 2022 would still be quite satisfactory. But it will be interesting to see how Berry will deal with changing consumer trends and lower consumer confidence levels going forward.

For 2022, the company has reiterated its official guidance: It expects to report an EPS of $7.40 which would mean the company is trading at less than 7 times earnings. The official cash flow guidance calls for a $750 free cash flow result, and as you can see below, this includes about $150M in non-recurring working capital elements which explain the decrease from the previous $900M-$1B free cash flow guidance.

Full-Year Guidance

Berry Global Investor Relations

We’ll see in a few months how Berry Global performed in FY 2022, but it’s clear the free cash flow result will once again be strong.

It’s also important to understand that of the $750M in capex, only about $340M is sustaining capex. And even if you would add the cost reduction capex but exclude growth investments, the total capex number is just around $500M per year. This means that if Berry would stop pursuing growth, the capex drops by about a third and the free cash flow increases by approximately the same percentage.

Capex Breakdown & Capital Allocation

Berry Global Investor Relations

Investment thesis

From here on, the company’s capital allocation decisions will be very important. The company doesn’t pay a dividend, but it has been buying back its own shares in a relatively aggressive way as it spent almost $640M on share buybacks. As the balance sheet still contains about $9B in net debt, I wouldn’t mind seeing Berry hoarding a little bit more cash to move toward the lower end of its leverage guidance range of 3-3.9 times EBITDA.

I have written put options on Berry Global and those options are now “in the money” after the weak performance of the share price in the past few days and weeks. This means I will likely have to take delivery of the stock.

Be the first to comment

Leave a Reply

Your email address will not be published.


*