GROWTH DECELERATES EARLIER THAN EXPECTED; LONG-TERM POTENTIAL INTACT
THE TD COWEN INSIGHT
We anticipated eventual growth deceleration, but it came a little earlier than expected. CCL's overall Q3 results were robust but slowing organic growth was more pronounced than our forecast — particularly for the CCL and Checkpoint segments. We have tempered sales and EPS growth expectations through 2026 and lowered our target to $94/share from $98/share. We maintain our Buy rating.
Event
CCL reported Q3/24 results after market close on November 13. Adjusted EPS (fully diluted) of $1.08 was 5% below our estimate of $1.14, but close to the consensus forecast of $1.09. Adjusted y/y EPS growth decelerated, led by slowing organic expansion and modest margin compression. Consolidated Q3/24 EBITDA of $380.7 million was similarly 5% below our estimate of $399.6 million, but close to consensus of $385.0 million.
Impact: SLIGHTLY NEGATIVE
We remain constructive on CCL's long term earnings outlook but are lowering our mid- term earnings estimates slightly to reflect more conservative growth assumptions. We are trimming our target to $94.00/share from $98.00/share on the back of forecast revisions and modest adjustments to our sum-of-the-parts valuation.
Q3/24 sales increased 9.4% y/y — below our 11.7% y/y forecast and slower than Q2 growth of 12.2%. Overall organic sales growth of 6.9% y/y compared with our 7.5% y/y forecast. Each segment generated positive y/y revenue trends, but expansion at the CCL division and to a lesser extent, Checkpoint, lagged our forecast.
Overall Q3 EBITDA margins of 20.6% were just short of our 21.2% forecast. New facility start-up costs impacted CCL profitability. Margin gains at Innovia (16.7% in Q3 versus 14.8% LTM) reflected strong North American demand; benefits associated with recent restructuring initiatives should start to be evident in Q4.
CCL's flexible balance sheet provides capital deployment options. Trailing net debt/ EBITDA of 1.1x was essentially flat q/q and quarter-ending liquidity was robust at $2.0 billion. Management is evaluating potential acquisition targets — though valuations remain challenging — and sees ongoing share buybacks as a value-accretive use of surplus free cash flow (1.85 million shares repurchased YTD for $40.6 million).
Management's outlook commentary on the conference call was more measured than in recent quarters. More difficult comps are expected starting in Q4/24. CCL is also facing headwinds from deflationary pressures and plant start-up costs. RFID-driven growth at Checkpoint is a structural tailwind and the recovery at Innovia is expected to continue.
We have a BUY rating on CCL, supported by what we view as an attractive valuation, given the company's established business model, growth verticals, long-term track record of consistent EPS/FCF growth, and strong ROCE (long-term average of 14.6% vs. the peer- group average of 12.9%). The outlook on CCL's core labels and packaging businesses (>60% of sales and EBITDA) remains strong, tied to long-term global GDP growth and market-share gains over time, based on the company's diverse service offering. Legacy CCL and Avery segments offer investors a resilient base of recurring free-cash-flow generation, which is redeployed towards organic and external growth. In our view, CCL has a proven history of value-accretive growth initiatives. Between 2010 and 2023, the company's adjusted EPS CAGR was 18%.