Bonhoeffer Capital Management, an investment management firm, published its second-quarter 2022 investor letter – a copy that can be downloaded here. The Bonhoeffer Fund returned -14.9% net of fees in the second quarter of 2022. In the same time period, the MSCI World ex-US, a broad-based index, returned -14.7%, and the DFA International Small Cap Value Fund, its closest benchmark, returned -13.7%. Go over the fund’s top 5 positions to have a glimpse of its finest picks for 2022.
In its Q2 2022 investor letter, Bonhoeffer Capital Management mentioned Berry Global Group, Inc. (NYSE:BERY) and explained its insights for the company. Founded in 1967, Berry Global Group, Inc. (NYSE:BERY) is an Evansville, Indiana-based plastic packaging products manufacturer and marketer with a $5.9 billion market capitalization. Berry Global Group, Inc. (NYSE:BERY) delivered a -35.63% return since the beginning of the year, while its 12-month returns are down by -23.88%. The stock closed at $47.49 per share on September 23, 2022.
Here is what Bonhoeffer Capital Management has to say about Berry Global Group, Inc. (NYSE:BERY) in its Q2 2022 investor letter:
“As described in previous letters, our investment universe has been extended beyond value-oriented special situations to include growth-oriented firms using a value framework. This includes companies that generate growth through transition and consolidation. There have been modest changes within the portfolio in the last quarter in line with our low historical turnover rates. We sold some of our slowergrowing names and invested some of our cash into Thryv (described in the case study below) and Berry Global Group, as well as to fund the Millicom rights offering and oversubscription. There are also some interesting developments in the US digital marketing market that I discuss below.
One example of public LBO firms you have in your portfolio is Berry Global (Berry). Berry is a plastic and engineering materials packaging firm that provides packaging solutions to health, hygiene products, and consumer products firms in the United State and Europe. Berry’s growth model focuses on plastic and engineered materials continuing to take more shares of packaging from other materials, specifically in the health, hygiene, and consumer products realm where the growth is the strongest which provides 2- 3% annual growth. Synergistic M&A is adding an additional 3-4% per year to growth. These sources of growth are enhanced by opportunistic operational leverage from scale and share repurchases (5% annual growth). Over the past eight years, Berry’s net income margins doubled, with a 3x increase in revenues. These factors should lead to 10-12% EPS growth going forward. Berry has had 18% and 28% EPS growth over the past five and 10 years, respectively. Part of Berry’s strategy is to lever up to purchase a geographically expanding or complementary product packaging firm and pay the debt down with cash flows post acquisition, similar to private equity funds. Berry has done this three times since its IPO in 2011. Once debt is paid down a reasonable level, Berry has been repurchasing stock if another reasonably priced acquisition cannot be found. This strategy is similar to that of Asbury, described in previous letters. Compared to other packaging firms, Berry has amongst the highest inventory turns and margins. This has resulted in 25% to 40% returns on equity over the past five years. Berry currently trades for a FCF multiple of about 7.6x and a free cash flow yield of 13%. Berry’s BBBrated debt (with an EBITA coverage ratio of 6.2x) is currently yielding 6.2%, for a FCF-debt yield of 6.8%, which is high compared to the current market equity risk premium of about 5% and the projected growth in excess of the market. Given the projected EPS growth of 10% per year, Berry should trade at 29x earnings using Grahams’ formula of 8.5 + 2 * growth rate. Even at half this multiple—15x—Berry would trade at two times its current price.”
Photo by Lalit Kumar on Unsplash
Our calculations show that Berry Global Group, Inc. (NYSE:BERY) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Berry Global Group, Inc. (NYSE:BERY) was in 37 hedge fund portfolios at the end of the second quarter of 2022, compared to 42 funds in the previous quarter. Berry Global Group, Inc. (NYSE:BERY) delivered a -16.89% return in the past 3 months. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q2 page.
Disclosure: None. This article is originally published at Insider Monkey.
