This deep dive and included model is great, thanks for putting this up on substack! A few comments, questions (please forgive anything stupid here):
Your IRR is 18%, but annualized return of stock price from $55 to $182 is 12.7%, add maybe 1% for dividends, and you arrive at 14% annualized. Do you think 18% return overstates the buy case here? Please correct me if I have this wrong.
Are you concerned that management will grant large numbers of shares to themselves over the next 10 years? I think even just granting options and RSUs they have authorized (about ~15M) would negate most of the effects of repurchase you built into the model.
It's a good question. I wouldn't lean too heavily on the $182 - if you flex the price at which they buy back shares on the Model tab that'll change a lot, and if you took buybacks out completely it would be some much lower number because that particular calc ignores cash balances. So if you're running the return calc that way I'd add the cash balance as well (particularly if you had cash build). The second thing is that technically it's not exactly 10 years for the CAGR calculation. I say "10 years" because it's a 10Y DCF, but technically we're more than half way through their calendar '23, so it's more like 9.4 years or something like that.
If you look at my IRR calculation on the DCF tab of the model (row 123) it makes that partial year adjustment and factors in the cash balance, and then just runs IRR on the cash flow stream and TV.
As for the dilutive securities, I tend to just treat that as a cash expense in valuation. I don't add back SBC to calculate CFO. I could instead add new dilutive securities the the outstanding shares but then add back the SBC to calculate CFO. That would increase CFO and cash available to repurchase shares. The net result should be ~ the same as if you treat it as a cash expense, so I just skip that entire calc completely.
What are your thoughts on the debt maturation in 2026 of $6.5B? This seems like a pretty substantial risk for the company that they both get downgraded and / or repriced into something like 8-10%. They would have little to no negotiating power there I would think, as they can't cover these maturities with cash flow.
Higher rates is certainly a risk. They most recently issued $500mn at 5.50%, so I had that debt rolling at 6.0% in my base case. I think they can A) reduce absolute debt modestly by 2026 using FCFE, and B) realize slightly higher EBITDA via organic growth, such that their leverage metrics wouldn't be materially different from the average packaging comp. So I'm not that worried about the debt rolling (risk of downgrade), it's more about properly reflecting that higher interest expense in valuation. If it reprices at 7% instead of 6% it would reduce my estimate of fair value by about 5% - not the be-all/end-all, but worth monitoring.
Thanks for the great write up. One question I had is whether falling oil and natural gas prices (as we are seeing at the moment) are in incremental positive for BERY? I guess that might be somewhat countered by the fact that the oil price falling is signalling falling demand and recession, but in isolation lower oil and gas prices lower input costs so are a good thing I think?
Thanks! Since resin is ultimately a pass-through cost, I don't think you should expect that lower (higher) raw material prices would have a good (bad) readthrough for EBITDA. There might be some modest lag to the pass-through mechanism, but over any multi-quarter period I don't think it impacts profitability.
This deep dive and included model is great, thanks for putting this up on substack! A few comments, questions (please forgive anything stupid here):
Your IRR is 18%, but annualized return of stock price from $55 to $182 is 12.7%, add maybe 1% for dividends, and you arrive at 14% annualized. Do you think 18% return overstates the buy case here? Please correct me if I have this wrong.
Are you concerned that management will grant large numbers of shares to themselves over the next 10 years? I think even just granting options and RSUs they have authorized (about ~15M) would negate most of the effects of repurchase you built into the model.
Thanks Heath!
It's a good question. I wouldn't lean too heavily on the $182 - if you flex the price at which they buy back shares on the Model tab that'll change a lot, and if you took buybacks out completely it would be some much lower number because that particular calc ignores cash balances. So if you're running the return calc that way I'd add the cash balance as well (particularly if you had cash build). The second thing is that technically it's not exactly 10 years for the CAGR calculation. I say "10 years" because it's a 10Y DCF, but technically we're more than half way through their calendar '23, so it's more like 9.4 years or something like that.
If you look at my IRR calculation on the DCF tab of the model (row 123) it makes that partial year adjustment and factors in the cash balance, and then just runs IRR on the cash flow stream and TV.
As for the dilutive securities, I tend to just treat that as a cash expense in valuation. I don't add back SBC to calculate CFO. I could instead add new dilutive securities the the outstanding shares but then add back the SBC to calculate CFO. That would increase CFO and cash available to repurchase shares. The net result should be ~ the same as if you treat it as a cash expense, so I just skip that entire calc completely.
Hope that helps!
What are your thoughts on the debt maturation in 2026 of $6.5B? This seems like a pretty substantial risk for the company that they both get downgraded and / or repriced into something like 8-10%. They would have little to no negotiating power there I would think, as they can't cover these maturities with cash flow.
Higher rates is certainly a risk. They most recently issued $500mn at 5.50%, so I had that debt rolling at 6.0% in my base case. I think they can A) reduce absolute debt modestly by 2026 using FCFE, and B) realize slightly higher EBITDA via organic growth, such that their leverage metrics wouldn't be materially different from the average packaging comp. So I'm not that worried about the debt rolling (risk of downgrade), it's more about properly reflecting that higher interest expense in valuation. If it reprices at 7% instead of 6% it would reduce my estimate of fair value by about 5% - not the be-all/end-all, but worth monitoring.
Thanks for the great write up. One question I had is whether falling oil and natural gas prices (as we are seeing at the moment) are in incremental positive for BERY? I guess that might be somewhat countered by the fact that the oil price falling is signalling falling demand and recession, but in isolation lower oil and gas prices lower input costs so are a good thing I think?
Thanks! Since resin is ultimately a pass-through cost, I don't think you should expect that lower (higher) raw material prices would have a good (bad) readthrough for EBITDA. There might be some modest lag to the pass-through mechanism, but over any multi-quarter period I don't think it impacts profitability.