Amcor

Amcor's fiscal 2026 adjusted EPS of USD 4.02 was at the top end of recently lowered guidance. The period was marred by macroeconomic weakness, particularly in the US, and cost inflation since the beginning of the Iran war.

Why it matters: Excluding Berry, organic volumes fell 2% while price/mix was flat. We think this is a reasonable outcome given the backdrop. The US Census reports grocery sales growth was about 1% in the same period, but Amcor also has sales in higher-end and discretionary categories, so we are not surprised by the slight volume pull-back. Organic price growth was flat. The balance sheet is in better shape than we expected, following non-core asset sales. Net debt/adjusted EBITDA of 3.5 at June 30, 2026 is below our 3.8 estimate. We estimate it falling to 2.8, at the top end of the 2-3 target range, by the end of fiscal 2029.

The bottom line: We raise our fair value by 2% to AUD 85 for narrow-moat Amcor on modestly higher sales growth and the time value of money. Shares trade at a lofty discount. We think the market fails to appreciate its strategy to expand in high-growth categories, such as healthcare and nutrition, aiding above-market share growth.

Big picture: We expect flat sales and EBIT margins in fiscal 2027 as economic weakness persists while the Iran war persists. Beyond this, we slightly lift our revenue forecasts for rigid sales, growing off a higher-than-expected fiscal 2026 base with Berry's expanded range now included in the category. Generally, we expect sales to grow in line with population growth or consumption, inflationary pricing, and higher price and sales growth from niche packaging segments.

Between the lines: We previously cut expected fiscal 2027-29 dividends by 25% as the balance sheet seemed too stretched. But given our expectations for improved working capital and EBITDA, and a further noncore divestment, we think balance-sheet trembles have passed, providing scope for dividends to keep growing.

Amcor is moving to a calendar-year financial reporting period from January 2027. We continue to model a June fiscal year-end for now and will make necessary modeling changes when it reports the current half-year in February 2027. This change is purely cosmetic and will have no impact on our valuation.

Our fair value estimate is AUD 85/USD 60 per share.

Our near-term earnings estimates are lower over fiscal 2027 and 2028 given macroeconomic headwinds from the conflict in the Middle East. With inflation running high and household budgets stretched, we expect consumers to buy products with cheaper packaging—such as in bulk, or of lower quality—or fewer discretionary or convenience items, weighing on Amcor's sales. However, we expect elevated oil prices and the consequent macroeconomic fallout to be mostly over by fiscal 2028, after which we revert to our normalized sales forecasts.

Our longer-term earnings forecasts are predicated on growth in sales volume and a mix shift to higher-value products. We also estimate low-single-digit annual revenue growth from sales opportunities such as introducing Amcor's business to Berry customers and vice versa.

Over the long run, we expect sales volume to grow roughly in line with population growth. About three-fourths of revenue is from developed countries, including North America (50%), Western Europe (25%), and Australia and New Zealand (5%). The remainder is from emerging markets, which comprise about 25 countries throughout Latin America, Europe, Asia, the Middle East, and Asia. We expect mid-single-digit volume growth in emerging markets, as end consumers increase their consumption of packaged products, and low-single-digit volume growth in the more mature developed markets. Amcor’s customers are mostly in the defensive food and beverage segments. As such, we expect only modest volatility in volumes through the economic cycle.

We forecast most revenue growth to come from product mix shift as the company increases its sales of higher-value products, such as animal protein or medical packaging. These products are more expensive due to complex machinery or processes required in manufacturing, increased use of resins and other materials, and detailed or bespoke customer requirements.

Customer contracts are typically short, at about two to three years, and we expect continual small improvements in price as lower-priced contracts end, and the firm seeks higher-value opportunities. The firm has been growing its exposure to higher-margin segments such as pet food, protein, healthcare, hot-fill beverage, and coffee. These contributed about one-fourth of revenue in fiscal 2023, up from an estimated one-fifth five years prior.

Amcor has a narrow moat derived from a cost advantage. We think Amcor’s scale as the largest global provider of plastic packaging and transportation benefits from proximity manufacturing with customers, providing a durable cost advantage.

Amcor is the largest global provider of plastic packaging, with operations in 37 countries. In its main geographies of North America, Europe, Latin America, and Asia, the next-nearest competitor has less than half as much market share. With roughly half of its manufacturing cost structure being resins, a small advantage in resin costs makes for a meaningful unit cost advantage. We estimate large-scale players enjoy better terms with the petrochemical industry than smaller competitors. Our analysis indicates Amcor’s advantage in total manufacturing costs—and thus improved gross margins relative to nonscale players—drives its higher ROICs above its weighted cost of capital of 8% over our forecast period. ROIC, including goodwill, averages 12% over our forecast period to fiscal 2034.

We also think Amcor has a cost advantage from lower transportation costs relative to peers. With transport costs particularly onerous for commodity thermoplastics once processed, geographic proximity to customers’ manufacturing sites is imperative. We estimate about one third of revenue is exposed to a transportation cost advantage from embedded customer manufacturing. This is where Amcor establishes a plant very close or adjacent to the customer. Generally, the two plants are practically connected to allow low-cost transportation of products. This applies to most of the rigids business and some of the flexibles business. The contracts for these arrangements are longer, at about seven years compared with two to three years generally. These relationships also create stickiness and have a much greater likelihood of renewal at the end of the contract period. At renewal, we believe Amcor has the negotiating power because it owns the closest plant to the customer and can offer the lowest price contract due to lower transportation costs than a competitor without a proximity benefit.

In rigids, this is cost-effective because transporting empty plastic bottles adds extra costs. Hence, we estimate most rigids customers have on-site arrangements, including Amcor’s largest rigids customers, Pepsi and Coca-Cola.

In flexibles, on-site manufacturing is practical when a customer requires a large volume of highly specialized packaging products, such as Nespresso pods, and the firm can justify running a plant solely for this customer’s needs. We estimate about one fifth of flexibles revenue is exposed to such arrangements.

A secondary transportation advantage is due to the firm’s scale providing proximity to customers. In the largest geography of North America, Amcor has 24 rigids plants, with industry-leading asset productivity and unit cost positions. In the North American flexibles business, Amcor has 33 plants, in addition to three for specialty cartons (cigarettes) and one for capsules (coffee pods). Fifteen plants are strategically located close to customers in Wisconsin, including Nestle and Kraft Heinz. Its market share in North America flexibles is more than twice that of the nearest competitor.

Exposure to high-growth emerging markets balances low-volume growth in mature developed markets for products with similar or higher profit margins.

Amcor’s global production network enables improved scale-based cost efficiencies leading to improved margins and profitability and the ability to further consolidate fragmented or subscale markets.

A focus on product innovation and differentiation leads to increased market share of niche, high-value-added products, resulting in margin growth.

Amcor’s aggressive acquisition strategy has the potential for overcapitalization, overcapacity, and lower-than-expected cost synergies.

Packaging innovation can be replicated by competitors, decreasing margins, and reducing returns from Amcor’s focus on innovation and product differentiation.

Environmental concerns and potential plastics legislation can reduce demand for plastic-based products and increase costs in manufacturing greener alternatives.