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CCL Industries Inc. Falls More Than 6%: Time to Buy?

With CCL Industries Inc.’s (TSX:CCL.B) share price falling yesterday by more than 6% and falling 10% from June highs of over $68, what should investors make of it?

Well, first off, let’s remember the high-caliber company we are dealing with here and use that to help us with our decision.

History of exceeding expectations

In at least the last eight quarters, CCL Industries has beat consensus estimates by a wide margin. In the latest quarter, the first quarter of 2017, the company reported EPS of $0.57 compared to estimates of $0.52. This represents a 9.6% beat.

History of dividend increases

The dividend has been raised regularly throughout the company’s history from an annual dividend per share of $0.40 in 2005 to an annual dividend of $2.30 in 2017. This represents a compound annual growth rate of 15.7%.

Valuation

CCL Industries is currently valued at 33.7 times trailing earnings, 6.2 times book value, and 20.8 times cash flow. These metrics may seem high, but I would like to put them into perspective by pointing out a few things. First of all, this year’s earnings are expected to increase 18.6%, and given the fact that management has consistently beat expectations, this could be conservative. So, the P/E ratio on 2017 expected earnings is a more reasonable 22.9 times.

The company has consistently achieved very high levels of ROE in its history, and its latest ROE is currently a very strong 19.74%. Investors are paying for this consistency, reliability, and stability that CCL Industries provides.

As far as the cash flow is concerned, it currently stands at $3.15 per share, and it is a very positive thing that cash flow exceeds earnings of $2.26 per share.

Caution

The company is currently pretty heavily indebted with a debt-to-capital ratio of 59.8%. This is due to the fact that CCL Industries has been very active in the M&A market to strengthen and expand its position within its markets.

In December, CCL Industries acquired British bank note maker Innovia for $842 million, and this made CCL Industries the leader in the fast-growing polymer banknote market. This acquisition follows numerous others, such as the $500 million acquisition of Avery Dennison in 2013, the world leader for software-driven digital-printing solutions.

So, while the company has done a phenomenal job with this, it is now left with a heavily indebted balance sheet, which will probably mean slower revenue growth going forward. Being cognizant of this fact is key, but I do not believe it takes away from the opportunity that we have in CCL Industries — a company that has positioned itself at the forefront of the global label industry.

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Fool contributor Karen Thomas has no position in any stocks mentioned. CCL Industries is a recommendation of Stock Advisor Canada.

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