Description

I’m long AptarGroup (ATR), which is a speciality packaging company with a particular focus on dispensing solutions. Aptar is a high quality, growing business that, in my view, is being misvalued because investors overlook its phenomenal Pharma segment. Absent a re-rating, this is a situation that is seemingly ripe for an activist or spin-off given low leverage, valuable assets and two very disparate business lines. The stock is currently $111 and I think value is $150-$160 over the next year. 

Note that ATR reports earnings tomorrow. I do not expect any fireworks and this is not a call on the quarter. Instead, my hope was to use this short write-up to introduce the situation as ATR is (for whatever reason) a relatively off-the-radar idea. 

Aptar has three segments: Beauty & Home (“B&H”), Food & Beverage (“F&B”) and Pharma. The first two segments comprise what I like to call its traditional packaging business. In B&H, ATR makes dispensers for lotions, shampoos, perfumes and, more recently, hand sanitizer. In F&B, ATR makes dispensing solutions and closures for things like Gatorde bottles and flexible food pouches. Combined, the traditional packaging segments account for over 60% of sales and draw the bulk of investor attention (this is due in no small part to the fact that ATR is largely covered by dedicated packaging analysts). 

The core of the thesis though is about the third segment, Pharma. This is a phenomenal healthcare business disguised, in my opinion, as a packaging company. The Pharma segment makes dispensing solutions used in nasal sprays, prescription grade inhalers and injectable devices. As a result, Aptar plays a key role in ensuring proper drug delivery and dosage. This extends beyond just allergy (think the dispenser on your Flonase) to areas like COPD, asthma and (increasingly) CNS as more drugs are being delivered intranasal for conditions like Alzheimer’s and depression. J&J’s SPRAVATO is a good example. 

The Pharma segment has a host of attractive qualitative attributes that are ultimately reflected in the numbers. For starters, Pharma is a niche business with very strong market share and limited direct competition. In its two key areas (nasal sprays and meter dose inhalers), ATR holds market share of 60-70% and 40-50%. Part of this stems from the barriers to entry, which are formidable. ATR’s dispensing and drug delivery mechanisms are part of the FDA review process so once they’ve been adopted it’s almost impossible to switch vendors (it would trigger an unpleasant and costly FDA review). As a result, ATR’s relationships in its Pharma segment are long tenured with sticky customers and a wealth of IP. In addition, ATR has good visibility for long-term growth as more drugs are being delivered intranasal and it is being built into trials with pipelines stretching 5 to 10 years out. 

Importantly, these attractive characteristics are reflected in the financials. Going back over 10 years, the Pharma segment has posted MSD+ organic growth with only one down year (FY09 organic growth was -2.1%). EBITDA margins (which have been resilient and steadily increasing) are an impressive 35-36% with CapEx running at just ~5% of sales. As a result, returns on tangible capital are compelling and one can only imagine that if ATR Pharma were to trade as a standalone it would likely fetch a very high multiple. The best comparable is West Pharmaceutical (WST), which has traded anywhere from 25-40x EBITDA over the past year.  

The reason that ATR is particularly interesting today is that COVID has presented a unique situation: the less valuable traditional packaging segments have dramatically slumped yet the much more valuable Pharma segment has continued to grow. Despite this, the stock is little changed. To put this into perspective, traditional packaging (B&H + F&B) should see FY20 EBITDA down ~20-25% whereas Pharma EBITDA is likely to be up 5-10%. What this means is that the mix shift to Pharma that had been ongoing for a number of years just accelerated in a big way. If you go back 10 years, Pharma accounted for 46% of segment EBIT in FY10 and that was up to 60% by FY15 (and high 60s pre-COVID). Still, most of the attention remained on traditional packaging given that it accounted for the majority of sales. However, in Q1’20 and Q2’20, Pharma accounted for an astounding 82% and 90% of segment EBIT! For FY20, Pharma will likely comprise ~85% of EBIT. In short, it’s almost all of the earnings.

As you might expect, this has created a situation where analysts on recent calls have started to ask why Pharma isn’t separated. Management seemingly does their best to dodge this topic and tends to give an answer about the synergies around knowledge sharing that isn’t particularly compelling. At the same time, ATR is being picked up by healthcare analysts (William Blair) and the company is starting to attend healthcare conferences. They just recently attended Wells Fargo’s healthcare conference, for example, even though they are covered by the packaging analyst. At the very least, such actions should start to shine a spotlight on ATR’s Pharma segment and maybe this will go further as a separation would seemingly unlock significant value. 

At the current price of $111, the TEV is $8.3b with only 1.5x of leverage. Pharma should do EBITDA this year of ~$415m and ~$460m in FY21. So ignoring the entire traditional packaging business, ATR appears to be trading at 18-20x EBITDA for just Pharma, assigning no value to anything else. Yes, that’s a high multiple but probably more than justified. On a SOTP basis, I apply 20x EBITDA to Pharma and 11x to traditional packaging to arrive at value of $155 on FY21, resulting in a blended EBITDA multiple of 17x. In truth, I think that Pharma would likely trade well north of 20x EBITDA if it stood alone given its attractive growth and high margins, not to mention the nosebleed valuation at peer WST. On the downside, FCF this year should be ~$4.30 and the stock has rarely traded <20x (it hit 18x in 2008). As such, I think downside might be mid $90s in a sell-off. 

The final thing I would note is that there’s an additional avenue for upside in that B&H is in the midst of a restructuring and apparently under-earning. Management has targeted getting this segment (47% of sales) up to 15-17% EBITDA margins. Margins will likely be ~10% in FY20 and I’m assuming 12% in FY21. I have not diligenced how realistic this is as I’ve been focused more on Pharma. That said, if management were able to turn around B&H and hit their goals, it would represent an incremental $100m in EBITDA or an extra $17/share in value at 11x EBITDA. 

It is also worth noting that if a future COVID vaccine is delivered intranasal (there has been some speculation to that effect), ATR could have a very large benefit but that seems like a long shot at the moment and it is not what I’m betting on. 

In sum, I think Aptar is an attractive business with an underappreciated Pharma segment, which now comprises the vast majority of earnings. Should Pharma continue to grow (as it likely will), I think ATR will start to attract a different investor base and/or get pressure to spin-off what’s undoubtedly a much higher multiple, higher margin and higher growth healthcare business.  

This report (the “Report”) with respect to AptarGroup, Inc. (the “Issuer”) has been prepared by the author (the “Author”) for informational purposes only. The Report contains certain forward-looking statements and opinions which are based on the Author’s analysis of publicly available information believed to be accurate and reliable. While the Author believes that such forward-looking statements and opinions are reasonable, they are subject to unknown risks, uncertainties and other factors that could cause actual results to differ materially from those projected. The Author has no obligation to inform readers of changes in such forward-looking statements and opinions and no warranty is made with respect to the accuracy or completeness of any of the information set forth herein. 

As of the date the Report is published, the Author and/or certain entities (the “Entities”) affiliated with the Author hold a short position in the securities of the Issuer and therefore have a financial interest based on changes in the price of the Issuer’s securities. The Entities may increase, decrease or otherwise change their position in the securities of the Issuer based on changes in market conditions or other analysis. Neither the Author nor the Entities undertake any responsibility to inform readers of changes in such position. 

Nothing in this Report constitutes investment advice. Readers should conduct their own due diligence and research and make their own investment decisions.

Catalyst

• Continued growth in the Pharma segment
• Further attention from healthcare focused investors
• An activist 
• A spin-off or other action by mgmt to unlock value