Lately the extreme heat in Calgary has made waiting for the bus particularly uncomfortable. On several occasions, I considered throwing in the towel and finding another way to get home, but a disciplined voice saying “patience pays” seemed to follow me from the QV office. Most times, the bus would arrive moments after I had pondered my options.
Stock market investors know the feeling of becoming impatient all too well. Seeing the value of an investment move sideways or lower for a while can feel like a lifetime in comparison to an investment that moves higher. Our patience has been tested on our fair share of investments, though our process emphasizes maintaining it for investments that fit our criteria. While CCL Industries scores above average on most of our seven tests, it has evoked feelings similar to those I felt while waiting for city transit. We sharpened our pencils and dove into more research into the company before making it one of the largest holdings in the Canadian large cap strategy.
Source: S&P Capital IQ, QV Investors
CCL Everywhere, Every Day
You may not have heard of CCL Industries, but as the world’s largest label maker, there’s a very high likelihood you interact with at least one of its products every day. Though small sticky pieces of paper and plastic are an otherwise small part of the total cost of most products, they are absolutely essential (how else could one easily tell if they are about to spray bug repellent rather than dry shampoo onto their hair?). What makes CCL unique from its competitors is its scale, the ability to create the most intricate labels on the market, and more than 200 production facilities on six continents, which appeals to multi-national companies demanding consistent quality.
Source: CCL Industries Investor Materials
We characterize more than 60% of CCL’s end markets as defensive, though CCL’s share price has moved up and down for a few years. It has been afflicted by plastic resin prices going haywire in 2019, supply chain disruptions during 2020-2022, geopolitical conflicts in Europe, and secular declines in stationery products (including CCL’s Avery brand of printed labels, tags, dividers, badges, etc.) Other investors have also grown impatient with CCL’s acquisition strategy which continues to be an important driver of its growth.
Waiting, but Not Sitting Still
While we have waited for CCL’s share price to appreciate, we recognize what it has achieved in the last five years. It has organically grown revenues by 3.5% per year (above the rate of GDP), maintained its industry-leading profitability despite the challenges mentioned previously, completed more than C$1 billion in acquisitions on favourable financial terms, maintained a clean balance sheet, and reinvested in its existing businesses for further growth.
Source: S&P Capital IQ, QV Investors
RFID Tagged for Success
One of the most lucrative and fascinating opportunities for CCL involves the production and encoding of radio frequency identification (RFID) tags. This is a US$5 billion market that is growing 20% per year as retailers seek to become ever more efficient in managing inventories between digital and physical stores. If you have ever used the checkout inside a Uniqlo store, you have experienced how effortless RFID technology can make an otherwise mundane task – now imagine implementing it across a commercial supply chain.
This year, a new factory in Mexico will triple CCL’s RFID label production and place it among the world’s largest suppliers, representing ~10% of the world’s capacity. The commissioning of the facility is timely in the context of Walmart expanding its RFID mandate for thousands of suppliers. As adoption grows from its relatively nascent level now, we see this as one among many of CCL’s unique growth opportunities which could continue for many years. Based on information from CCL and its competitors in the RFID market, we are optimistic that this business will propel revenue and profit growth well above the rate that CCL is achieving in its other segments.
Source: Avery Dennison Investor Materials
Label Us Confident
CCL Industries is comprised of recession-resilient franchises with low risk of obsolescence. In aggregate, we expect it will be likely to grow at a respectable rate at least equal to global GDP. It continues to generate a sizable amount of free cash flow annually which it is thoughtfully reinvesting back into its existing businesses while acquiring others to enhance its capabilities. Though CCL has not grown as quickly as other investors may have expected in the last five years, we are willing to continue being patient, confident that it is set up to deliver above-average returns without outsized downside risk.
