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Why Citi just downgraded Amcor from Buy to Neutral

We look at why Citi downgraded the packaging company from Buy to Neutral.

The market remains lukewarm on Amcor

If one thing: Amcor (ASX: AMC) has proven to be a stable investment over the last year. In that period that stock is down around just 1% -- opening Thursday’s session at $15.04 per share. Like many equities during 2020, Amcor saw its share price crash in March. At its 52-week low, AMC traded at just $9.87 per share.

Despite that volatile price action, Amcor reported a strong bump in earnings as part of its latest quarterly report while also upping its outlook for fiscal 2021.

Looking at that quarterly update in more depth, for the three months ending September 30, Amcor revealed earnings (EBIT) of USD$358 million, up 9%; while also reporting a sharp rise in GAAP earnings per share of USD 12.6 cents, representing a 207% increase.

On the top-line, Amcor's net sales dipped 1%, coming in at USD$3,097 million for the three months ending September 30.

While Amcor’s stock continues to trade flat, during the quarterly update, the company signalled its commitment to boosting shareholder returns: Noting that its quarterly dividend had risen to 11.75 cents per share

Elsewhere, Amcor noted that its quarterly dividend had risen to USD 11.75 cents per share while also announcing a buyback program valued at $150 million.

Commenting on those results AMC's CEO, Ron Delia noted that:

‘Amcor's 2021 fiscal year is off to a strong start with outstanding first quarter financial results ahead of our expectations. Demand for our products remains resilient and our teams continue to stay focused and to deliver excellent operational performance.’

The company further said it now expected earnings per share growth of around 7-12% for FY21 – above the previously expected growth range of between 5-10%.

‘Assuming current exchange rates prevail for the remainder of the year, it is estimated that currency would have no material impact on reported EPS,’ the company added.

Citi’s take

Despite those results, analysts from Citi this week downgraded Amcor from Buy to Neutral, while also modestly lowering their price target to AUD$$16.80 – citing the recent positive share price movements as driving ‘less upside to our target price’.

Despite being impressed by Amcor’s dividend yield and the flexibility of the company’s balance sheet, Citi analysts nonetheless said:

‘Our move to the sidelines further reflects a preference for Packagers with more cyclical exposure in 2021 (~96% of Amcor sales to food & bev and other consumer markets, with limited industrial exposure).’

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