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 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