On Apr 9, we issued an updated research report on Bemis Company, Inc. BMS. The company is poised to gain from the U.S. tax reform, its initiatives to improve cost structure through the Agility plan, and focus on capital allocation. However, close of the infant care business, seasonal factors and challenging economic environment in Latin America are expected to dent the company’s performance in the near future.

Let’s illustrate the factors in detail.

U.S. Tax Reform to Drive Earnings

Bemis projects earnings per share in fiscal 2018 to be $2.75-$2.90. The range includes an expected 31-cent benefit related to the tax reform. Also, the mid-point of the range reflects an 18% year-over-year rise in earnings. The guidance also highlights the company’s initiatives to improve cost structure through the Agility plan.

Bemis to Gain From Agility Plan

To fix, strengthen, and grow its business, Bemis rolled out an improvement plan — Agility — in fiscal 2017. The plan includes optimizing manufacturing capacity, consolidating office space, and reducing SG&A cost structure and other costs. It also includes simplification of product portfolio and organizational structure, rebalancing R&D efforts and deliberately pursuing targeted areas of growth in the North American business. These actions will lay the foundation for future growth.

Of the targeted pretax annual savings of $65 million, according to the plan, $4.1 million was realized in fiscal 2017. In fiscal 2018, Bemis anticipates to realize roughly $35 million of benefit.

Focus on Capital Allocation to Aid Performance

Bemis expects capital expenditures for fiscal 2018 to be between $156 million and $160 million. Of this, about $55 million is for environmental matters, health and safety at plants, and around $100 million is targeted for select growth projects and asset-recapitalization projects. During fiscal 2017, the company repurchased 2.2 million shares for $103.8 million. It recently approved a 3.3% increase in the quarterly cash dividend to 31 cents per share. Thus, Bemis remains committed to maintain a strong balance sheet and returning free cash flow to shareholders.

Close of Infant Care Business a Concern

Bemis was unable to contractually re-secure an important business related to infant care packaging produced at its Shelbyville, TN facility. The company expects that assets at this facility could not be redeployed and therefore it intends to close the facility in fiscal 2018. The base profit related to this infant care business was around $6 million annually. Thus, lack of profit from this business will impact the company.

Impact of Seasonality

Bemis expects that earnings in first-quarter fiscal 2018 will be in line with first-quarter fiscal 2017. Results in the quarter will be affected by seasonal factors.

Latin America Remains a Woe

Bemis’ operating profit in Latin America was significantly down during fourth-quarter fiscal 2017 as compared to the prior fiscal quarter, driven by the prevalent challenging economic environment in Brazil. In Latin America, the company expects volumes to remain relatively flat in fiscal 2018 as compared to fiscal 2017, as the economic environment has not yet recovered to the anticipated level.

Share Price Performance

Bemis has underperformed its industry with respect to price performance over the past year. The stock has lost around 9.5%, while the industry has recorded growth of 7.6% during the same time frame.

Zacks Rank & Stocks to Consider

Bemis currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same sector include AptarGroup, Inc. ATR, Barnes Group, Inc. B and Deere & Company DE. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

AptarGroup has a long-term earnings growth rate of 8.5%. Its shares have rallied 17%, over the past year.

Barnes Group has a long-term earnings growth rate of 10%. The company’s shares have been up 17% over a year.

Deere has a long-term earnings growth rate of 5.7%. The stock has gained 29% in a year’s time.

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