Why Upslope Capital Is Bullish On Bemis Company, Inc. (BMS)

Upslope Capital is bullish on Bemis Company, Inc. (NYSE:BMS), a manufacturer of packaging products headquartered in Neenah, Wisconsin. In its Q4 investor letter (you can download a copy here), the investment firm discussed its investment thesis on Bemis. So, let’s take a look at Upslope Capital’s comments about Bemis.

Bemis is a leading global packaging company, focused on flexible plastic films and other forms of plastic consumer packaging. Historically, Bemis has had a reputation for having strong technology, but more ‘engineering’-focused (as opposed to shareholder-focused) leadership. The company’s underperformance recently came to a head after it repeatedly missed earnings estimates and a major activist fund (Starboard Value) became a shareholder. As a result, a unique opportunity appears to have presented itself in this business that I have followed for several years, George Livadas, the founder and portfolio manager of Upslope, said in the letter.

Here is why Livadas sees an opportunity in Bemis Company, Inc.:

1) The company seems to be undergoing a sale process, in my view. Press reports (New York Post and others) over the past six months have suggested BMS could be sold. One report indicated interest in the company from a foreign strategic buyer; another suggested Bemis has hired an advisor to explore strategic options.

2) Bemis should be attractive to private equity buyers, based on my analysis. Given the nature of Bemis’ business – steady (if lackluster) end-markets, longer-term contracts, contractual pass-through of commodity price fluctuations – the company could support a significant amount of leverage. Its reputation for being under-managed should further add to potential private equity interest.

3) Strategic buyers may also be interested. Press reports have indicated potential interest from at least one strategic acquirer. While reports for that specific company have since been denied, the rationale remains: Bemis offers a buyer geographic and/or product (e.g. a primarily non-plastic packager) diversification. My assumption is that a strategic could pay more for BMS than a PE buyer, but that the odds of this scenario coming to fruition are lower.

4) The stock does not reflect the likelihood of a sale in a material way, based on my work. Given the above observations, my view is that the odds of Bemis being sold are greater than 50%. Based on my analysis of the stock’s performance since rumors first emerged of a potential sale, I believe the “unaffected” share price (i.e. what the stock should trade at if I am wrong about a sale) is ~$45.

5) Risks include: no deal (and, potentially incorrect conclusion/analysis regarding the unaffected price), continued top-line/volume weakness, challenging pricing environment, moderate current leverage, exposure to volatile emerging markets (e.g. Brazil), management turnover, and general uncertainty.