With Another Miss-And-Lower, Multi-Color's Credibility Is In Shreds

Multi-Color (LABL) management’s credibility is pretty much in the same shape as a beer bottle label after a nervous first date, as management once again missed expectations and lowered guidance on ongoing execution shortfalls. While the magnitude of the shortfalls was clearly a surprise relative to sell-side expectations (and mine), the root causes are all too familiar to long-suffering shareholders in this now-poorly-run company.

Management’s announcement that it is pursuing strategic options, including a potential sale of the company, confirms the rumor, but doesn’t really add much of a backstop. I don’t really see a strategic acquisition as all that likely, though a financial buyer (private equity) could perhaps be attracted by the possibility to clear out inefficiencies and low-return lines of business in the hope of cutting costs, boosting margins, and restarting the growth-through-consolidation engine before putting the company back on the public market.

I certainly regret not selling more of my holdings at higher prices, and I’m not going to tell anybody reading that this that they have a good reason to trust this management team to deliver/create value for them as a shareholder. That said, the shares do now look undervalued on what I believe (or perhaps “hope”) should be attainable targets for organic revenue growth and operating efficiency and there could be upside if the company can find a buyer.

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With Another Miss-And-Lower, Multi-Color's Credibility Is In Shreds

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

Multi-Color Needs To Get Back On Offense

Multi-Color (NASDAQ:LABL) has done pretty well since my last update on the company. The shares are about 25% since August of 2016, trailing industry leader CCL Industries [CCL.TO] (OTC:CCDBF) by a few points, but still outperforming indices like the NASDAQ and Russell 3000 in a generally strong tape for smaller companies.

Not all of this performance has been entirely merited by recent performance. While the last quarter (the company's fiscal fourth quarter) was surprisingly strong, that was a welcome relief after several quarters of lackluster performance related in part to difficulties managing growth. What's more, the company has noticeably slowed its growth-by-acquisition strategy to address some of those issues.

Wall Street is forward-looking, and I believe there are credible arguments supporting better results in the future for Multi-Color. Management seems willing (if not eager) to get back to M&A, and it seems as though external compliance and legal costs will no longer be as significant of an issue. What's more, management has been attending to operating efficiency issues, and I believe there is room to take operating margins into the mid-teens over the next 10 years.

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Multi-Color Needs To Get Back On Offense

After Multiple Stumbles, Multi-Color May Be Back On Track

Label manufacturer Multi-Color (NASDAQ:LABL) has suffered from some self-inflicted wounds in recent quarters. The company's decision to exit a low-margin label business with SABMiller (OTCPK:SBMRY) has tamped down organic growth, while significant acquisition integration and compliance remediation issues have hit margins. With that, the shares saw two painful gap-downs in the past year, though the shares have largely recovered from the second one.

Looking ahead, I still don't see these shares as a remarkable bargain. My model assumes low single-digit organic growth, consistent M&A, and steady margin improvements, but even double-digit growth only gets me to the mid-$60s for fair value. Perhaps the company could do better, particularly if it can build up its higher-margin healthcare business, but I believe it's too soon to assume that.

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After Multiple Stumbles, Multi-Color May Be Back On Track

Seeking Alpha: Multi-Color Trading Short-Term Pain For Long-Term Gain

I've had my issues with the valuation of Multi-Color (NASDAQ:LABL) from time to time, but I can't really complain about the overall performance of this "under-known" label company, as the shares are up over 200% for me as an investor and up about 150% from my first article on the company for Seeking Alpha. While management still has work to do on gross margin improvement, the company has delivered operating margin improvements while using M&A to grow its revenue base and establish foothold in growth markets.

Although the label industry isn't really R&D-driven, Multi-Color doesn't really get its due for innovation in areas like in-mold and heat-transfer labels, nor value-added features like peel-aways, holographics, tamper resistance, and other technically demanding innovations. I also wonder if the Street appreciates that about half of the company's plants are still operating below management's long-term margin targets and could offer significant margin leverage in the coming years.

To be sure, I'm not saying that Multi-Color is a cheap stock. I might still be too conservative with my numbers, but I think 10% free cash flow margins are still at least five years away (on a sustainable basis). The shares do trade at an EV/EBITDA multiple below my expected EBITDA growth rate, but this is a stock that I'd be a lot more aggressive on below $60.

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Multi-Color Trading Short-Term Pain For Long-Term Gain

Seeking Alpha: Multi-Color Remains Focused On A 'Rinse And Repeat' Business Model

I wouldn't say that label manufacturer Multi-Color (NASDAQ:LABL) is exactly toiling away in obscurity, as it has some big name institutional owners and sports a pretty healthy multiple, but this isn't the kind of business that typically attracts a lot of investor attention. That's fine as far as I'm concerned; labels aren't going away anytime soon, and Multi-Color still has a significant opportunity to consolidate the industry, improve its asset efficiency/utilization, and upgrade its product mix.

I believe that the Street has these shares more or less fairly valued today. I do believe that ongoing consolidation could offer some upside to my mid-single digit long-term revenue growth estimate, while better margins could likewise drive better free cash flow generation, but I already factor in what I think is a meaningful trajectory for self improvement. The company's issues with financial controls are a risk factor, particularly given the extent to which the company leans on M&A, but management does seem to be addressing this problem.

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Multi-Color Remains Focused On A 'Rinse And Repeat' Business Model

Seeking Alpha: Multi-Color Stumbles A Bit, But Still Has Ample Room To Do Better

It has been a while since I've thought Multi-Color (NASDAQ:LABL) shares were truly undervalued, but I've been reluctant to sell out of a story with good underlying momentum and significant long-term share growth and margin leverage potential. Even with the 5% drop on Friday in response to fiscal fourth quarter earnings, the shares are up about 10% over the last six months and more than 70% over the last year - not a bad return on patience.

I continue to expect Multi-Color to modestly outgrow the industry on an organic basis and supplement that internal sales growth with additional M&A. The label industry remains extremely fragmented and while it does not require tremendous capital investment for long-term competition, I nevertheless believe that scale still matters and favors players like Multi-Color and CCL Industries (OTC:CCDBF). Two of the biggest opportunities for Multi-Color remain in improving operating margin and asset utilization, as both could unlock greater free cash flow production. As is, the shares look fairly valued to slightly undervalued.

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Multi-Color Stumbles A Bit, But Still Has Ample Room To Do Better

Seeking Alpha: Multi-Color Showing Better Margins With Improving Growth

Making labels for consumer products like dish detergent, food, and beverages is not exactly a sexy business, but Multi-Color (NASDAQ:LABL) continues to operate its plan to good effect. Although Multi-Color isn't widely followed on the Street and doesn't have huge liquidity, investors in this combo story of steady organic growth, serial acquisitions, and margin leverage have done well over the past year.

Better still, organic growth seems to be picking up and margins continue to develop nicely and the company is just starting to tap into incremental growth opportunities like healthcare labels. I don't think these shares are particularly cheap at this point, but I'm not in any hurry to sell out of a position where the underlying story appears to be getting better.

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Multi-Color Showing Better Margins With Improving Growth

Seeking Alpha: Multi-Color's One-Two Growth And Margin Punch

Multi-Color (NASDAQ:LABL) has been on a tear over the last year, up about 50%, and as a shareholder I can't really complain. Over the last few quarters the company has seen not only improving organic growth trends, but better than expected contributions from acquisitions and faster improvements in margins. I do have some concerns that valuation is getting stretched, but margin leverage can unlock additional value and the company has a deep pool of acquisition candidates to augment internal growth efforts.

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Multi-Color's One-Two Growth And Margin Punch

Seeking Alpha: Multi-Color - Better Margins, But Growth Still A Challenge

The "it's always something" phenomenon that I've talked about before at Multi-Color (NASDAQ:LABL) came through again this quarter. While the company's gross margin was better than expected and its relatively recent Di-Na-Cal acquisition contributed more than expected, underlying organic growth remains frustratingly weak. I still believe this company has free cash flow growth potential in the high single digits to low double digits over the next decade, though, and that potential keeps the fair value just interesting enough to make these shares worth holding.

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Multi-Color - Better Margins, But Growth Still A Challenge

Seeking Alpha: Multi-Color Light On Growth, But Stronger On Margins

I suppose a cynic could say that "it's always something" when it comes to Multi-Color (LABL), as this label solutions company has found it challenging to generate attractive organic revenue growth and margin leverage in the same period. Price competition certainly isn't helping, as the company continues to see significant competition in lower value-added label categories. Even so, the company continues to churn out a pretty meaningful free cash flow stream and scale-derived margin leverage and long-term deleveraging suggest more FCF generation down the road. Multi-Color doesn't appear to be priced as a tremendous bargain today, but relatively modest outperformance on gross margin could still lead to meaningful surprises.



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Multi-Color Light On Growth, But Stronger On Margins

Seeking Alpha: Multi-Color Fades A Bit In The Third Quarter

Sometimes a couple of steps forward is followed by a step or two back. The operating leverage and margin improvement story at Multi-Color (LABL) isn't a one quarter or one year process, so I am not going to overreact to one disappointing quarterly result. That said, the ongoing weakness in pricing does highlight a significant challenge for the industry and sometime to watch when rival CCL Industries (OTC:CCDBF) reports later this week.

I continue to like Multi-Color as a multi-year play on greater consolidation in the label industry, better gross margins and operating leverage, and industry shifts toward more advanced (and expensive) label options. Consolidation has to be tempered with balance sheet risk and operating leverage is not a straight line process, but Multi-Color's basic thesis has not changed all that much. I continue to believe that these shares are priced to provide a decent premium to market returns over the next few years.

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Multi-Color Fades A Bit In The Third Quarter

Seeking Alpha: Multi-Color Showing Hints Of Stronger Operating Leverage

In the slow-growing label business, operating scale and efficiency is the name of the game and Multi-Color (LABL) showed some encouraging progress in that regard in the company's fiscal second quarter. I've written multiple times on this under-followed small-cap (here, here, and here), and the stock is up a solid 74% over the past year. Although I do believe there is significant room for Multi-Color and rival CCL Industries (CCDBF) to further consolidate the industry and drive better operating margins, expectations have definitely changed. I'm not in a rush to sell today, and I can see a path to a fair value in the low $40s, but this is definitely a situation where I'm starting to think about using protective stops or option-writing strategies to protect my gains.

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Multi-Color Showing Hints Of Stronger Operating Leverage

Seeking Alpha: CCL Industries On A Path Toward Printing Cash Flow

Like it's smaller American cousin Multi-Color (LABL), CCL Industries (CCDBF.PK) is a company whose products are in front of readers' eyes every day, and yet go largely unnoticed. You would never buy a bottle of shampoo or beer that had no label on it, and likewise all manner of companies in consumer goods, healthcare, chemicals, and so on require labels for their products.

That has created a global market worth an estimated $30 billion a year, with close to one-third of that in North America. Through organic growth, helped by the development of more advanced label-making capabilities, and acquisitions, CCL Industries has emerged as the leader in the industry. In this case, though, "leader" still means less than double-digit share, and CCL Industries not only has the opportunity to benefit from acquisition-related synergies, but also further utilize its balance sheet to consolidate a slow-growing but essential industry.

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CCL Industries On A Path Toward Printing Cash Flow

Investopedia: With Ball Corp, Quality Doesn't Come Cheap

It's always a great thing to acquire the shares of a quality company at a discount to their long-term fair value. Unfortunately, those opportunities are not all that common; while it's my experience that there's always some quality companies trading below fair value, an investor may have a long wait when it comes to particular companies. To that end, while I believe Ball Corp (NYSE:BLL) is a fine company, and maybe the best in packaging, today's valuation doesn't look like any particular bargain.

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