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Why Is Bemis (BMS) Down 1.7% Since the Last Earnings Report?

Zacks Equity Research
Q1 Earnings, Initial Claims In Focus

It has been about a month since the last earnings report for Bemis Company, Inc. BMS. Shares have lost about 1.7% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Bemis Q3 Earnings Top, Trims '17 View on Low Volumes

Bemis reported third-quarter 2017 adjusted earnings per share of 70 cents, down 7% year over year. However, earnings beat the Zacks Consensus Estimate of 64 cents. Results in the quarter were affected by the challenging economic environment in Latin America due to political instability.

Including one-time costs, earnings came in at 61 cents per share compared with 72 cents reported in the prior-year quarter.

Operational Update

Net sales inched up 0.8% to $1,035 million from $1,027 million recorded in the year-ago quarter. Revenues also beat the Zacks Consensus Estimate of $1,026 million.

Cost of products sold went up 3% year over year to $827 million in the quarter. Gross profit dipped 8% to $207.7 million from $225 million reported in the prior-year quarter. Gross margin contracted 180 basis points (bps) to 20.1% in the quarter.

Selling, general and administrative expenses were down 1% to $94.6 million from $95.8 million incurred in the year-ago quarter. Adjusted operating income declined 12% year over year to $103.1 million. Adjusted operating margin contracted 140 bps to 10% in the quarter.

Segment Performance

Net sales at the U.S. Packaging segment improved 2.2% year over year to $672 million driven by higher unit volumes.  Segment operating profit dipped 1% to $99.6 million from $100.8 million in the prior-year quarter. Previously-negotiated contractual selling price reductions on select products, partially offset by manufacturing efficiencies and the benefits of increased unit volumes, led to the decline.

Net sales at the Global Packaging segment edged down 1.8% year over year to $362.8 million. Currency translation had a positive impact of 0.5%. Organic sales dipped 2.3% due to the unfavorable mix of products sold, partially offset by sales price increases. Global Packaging unit volumes were relatively flat year over year, due to  poor volumes in the Latin American business, offset by net volume growth in the remaining regions of the Global Packaging Segment. Segment operating profit plunged 32% to $24.6 million from $36.2 million recorded in the year-ago quarter.

Financial Update

At the end of the third quarter, Bemis generated cash and cash equivalents of $44.7 million, which decreased from $74.2 million recorded at the end of 2016. Cash flow from operations came in at $299.5 million during the nine-month period ended Sep 30, 2017, compared with $348.4 million in the comparable period last year.

At the end of the reported quarter, Bemis’ total debt increased to $1.551 billion compared with $1.545 billion recorded at the end of 2016.

Restructuring & Cost Savings

During the third quarter, Bemis completed the analysis of its restructuring and cost-savings plan to properly align manufacturing and administrative cost structures. Additionally, it intends to better position the company in the current business environment as well as for the long term. In September 2017, Bemis announced the remaining details of its restructuring and cost savings plan to reduce the company’s fixed manufacturing and administrative cost structures. Pre-tax annual savings run rate is projected at $65 million. Estimated total pre-tax costs to implement the plan are projected in the range of $100-$125 million. Of the total, pre-tax cash expense is estimated between $70 million and $80 million.

Per the plan, Bemis will close four manufacturing facilities. Work performed at these facilities will be transferred to other Bemis locations. Closure of two of these facilities has been initiated this year and the rest will commence in 2018. Benefits from these four plant closures will be approximately $17 million, when fully realized.

Bemis will consolidate a portion of its administrative facilities, benefits from which will be approximately $5 million, when fully executed. The company will also its lower administrative support cost structure to align with the current business environment. Bemis will reduce 8% of the global administrative workforce. Total savings will be approximately $35 million when fully implemented. Additionally, Bemis has identified numerous opportunities for cost efficiency across a variety of operational and administrative activities and functions, which will lead to $8 million of savings.

Guidance

Bemis lowered its 2017 adjusted earnings per share guidance range to $2.35-$2.40 from the prior range of $2.35-$2.50. The lower guidance reflects lower unit volume projections for the fourth quarter from some of its U.S. customers as well as expected hurricane-related impact in the fourth quarter.

The company maintained its cash from operations guidance range of $400-$425 million. Management expects capital expenditures for 2017 between $185 million and $200 million to support its undergoing projects.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.

VGM Scores

Currently, the stock has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value and growth investors than momentum investors.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of this revision also indicates a downward shift. Interestingly, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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