Shares in large-cap Amcor (AMC) recently dipped into discount territory for the first time in three years, meaning the ASX 50 company may appeal to investors seeking to pick up a blue-chip stock without paying a premium.

Earlier this month, shares in the world’s largest consumer packaging manufacturer sank more than 9%, after the company downgraded its full-year profit forecast by around 5% in its third quarter report.

The company, which is best known for manufacturing bottles and food wrappers for well-known consumer staples, attributed to the guidance downgrade to a decline in volume, as demand weakens in the US and Europe and clients look to ‘de-stock’ their inventories.

The selloff means Amcor shares are now trading in 4-star territory - meaning undervalued - for the first time since May 2020.

Over the past three years, shares in the company have screened as either, 2-star (‘overvalued’) or 3-star (‘fairly valued’) based on Morningstar’s assessed fair value price.

The last time the company traded in 4-star territory, Amcor shares made Morningstar’s best stock ideas list for April 2020. At the time, Morningstar analysts noted Amcor’s strong balance sheet and defensive consumer staples-related business segment as drawcards for the stock.

Amcor's disappointing earnings result caused Morningstar to lower its fair value estimate (FVE) from $17.00 per share to $16.00, citing a reduced near-term outlook.

However, the 6% decrease in Amcor’s FVE was outstripped by the 9% decline in the share price, pushing the stock further into undervaluation and triggering the star-rating change.

Long-term outlook balances near-term woes 


Morningstar analyst Trevor Huynh says the results were materially weaker than expected, driven down by weakening consumer demand which adversely affected volumes.

“Despite the defensive nature of Amcor's end-market exposures of consumer staples, healthcare, personal care, and beverages, the company is not immune to a slowdown in consumer demand and higher interest rates,” he says.

In the near-term, Amcor’s management expect the third-quarter volume weakness to accelerate into the fourth quarter. This could combine with high raw material costs to place further pressure on margins, according to Huynh.

Morningstar’s longer-term view of the stock, however, appears more promising.

“While short-term volumes are disappointing, longer-term, we are more constructive over Amcor's volumes and forecast improvement once customer destocking and consumer trading down completes,” Huynh says.

“From there, we expect Amcor to incrementally improve returns on invested capital over time.

“This reflects forecast strong single-digit organic sales growth through the reinvestment of free cash flows into emerging markets and higher-margin differentiated products.”

While the company missed market expectations most recently, Huynh says the Amcor remains a “consistent performer” which facilitates the compounding of value over time.

“Amcor remains a consistent earner generating earnings and cash flow from a defensive exposure to consumer staples and healthcare,” he says.

That consistency is further underpinned by the company’s scale, which Huynh says gives its advantages over its peers.

“We believe Amcor's cost advantage is driven primarily through procurement, that is buying in bulk and on better terms, and fractionating fixed costs on large volumes allowing Amcor to aggressively drive down unit product costs and maximise profitability in the highly commoditised packaging products sector,” he says.

These cost-advantages underpin Morningstar’s narrow-moat ranking for the stock. Companies granted a narrow-moat rating have competitive advantages that are considered strong enough to fend off competition and earn high returns on capital for more than 10 years.

Shares in Amcor have recovered marginally since plunging earlier this month but are still trading at a slight discount to Morningstar’s revised fair value estimate of $16.00 per share.

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