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Berry Plastics (BERY) Initiated at 'Buy' by Deutsche Bank on Compelling Valuation

 November 13, 2012 01:56 PM


(By Balaseshan) Deutsche Bank analyst Mark Wilde initiated coverage of Berry Plastics Group Inc. (NYSE: BERY) with a "buy" rating and $17 price target based on compelling valuation.

Berry Plastics is a leading producer of consumer-oriented plastic packaging. With sales of about $4.7 billion a year, Berry is largely U.S.-oriented and sells a mix of rigid & flexible packaging, Wilde noted. Berry enjoys #1 or #2 market positions in most of its businesses.

Looking ahead, thanks to a promising new product pipeline and cost savings and synergies from recent acquisitions, Berry has the potential to deliver above-trend growth and focus on deleveraging, the analyst noted.

Berry has grown sales and EBITDA at a 20 percent-plus CAGR since 2000. Much of Berry's growth has historically been driven by acquisitions – a skill the firm has honed over time, the analyst noted.

While acquisitions will remain an essential element of strategy, Wilde expects the focus to pivot toward organic growth opportunities and balance-sheet deleveraging. Among the organic initiatives are the new Versalite hot cup based upon a proprietary expanded-polypropylene technology.

Post-IPO net debt/EBITDA is about 4.9 times. Along with improving EBITDA margins and stability of performance, the analyst thinks investors will be closely monitoring Berry's ability to reduce leverage over time.

By year-end Dec 2014, Wilde thinks Berry will be able to reduce its leverage to just under 4.0 times. That ratio could improve further if Berry is to expand EBITDA beyond our current targets.

On an EV/EBITDA basis, the stock currently trades at 6.6 times the analyst's calendar 2013 EBITDA estimate of $850 million. His $17 price target equates to 7.0 times this estimate, which he views as conservative.

Wilde said his targeted multiple is 1 times below where the peer group currently trades. As the deleveraging thesis is "borne out" in results, he thinks there is potential for that valuation discount to shrink. He noted that 1 times equates to about $7.

BERY is trading up 1.98 percent at $14.15 on Tuesday.

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