Multi-Color Has A Large Addressable Market, But Mind The Operating Volatility

Multi-Color (LABL) is making a bad habit of posting noisy quarterly results that lead to substantial volatility in the share price. The problems are largely margin-related and have reached a level where they're overriding surprisingly strong organic growth trends in the business, and it is getting harder to believe this issue is going to resolve as the company has the not inconsiderable job of integrating a major acquisition that has a lot of different moving parts.

I had mixed feelings about the Constantia deal when it was announced and I still do - while expanding the business in Europe makes sense, I have concerns about the greater exposure to lower-margin, more commodity-like business. I would have preferred to see Multi-Color acquire more capabilities in higher-margin businesses like healthcare, but that could still come.

The "operating inefficiencies" cited by management and the more erratic margin performance has widened my fair value range on the shares, but I do believe the shares are still undervalued. Multi-Color really needs to post a few good, boring quarters and restore confidence that this combination is a real value-creating event for shareholders.

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Multi-Color Has A Large Addressable Market, But Mind The Operating Volatility