Shoppers need to buy household products in every country. Toothpaste, laundry detergent, shampoo, and other consumables also have buyers even when the economy’s weak. Investors know the companies that sell these products, and follow their expansion into foreign markets. Consumer products makers aren’t the only companies that benefit when shoppers buy household items, though. A bar of soap or a container of detergent needs a label, which could mean a sale for label maker Multi-Color Corporation (NASDAQ:LABL).
Customers
Multi-Color Corp’s located in Cincinnati, Ohio, which helps explain the demand for its labels. Cincinnati’s also the home of consumer goods manufacturer The Procter & Gamble Company (NYSE:PG). Procter & Gamble remains an important customer of Multi-Color Corporation (NASDAQ:LABL), but the label maker has become less dependent on the consumer goods giant in recent years. Sales to Procter & Gamble provided 33% of Multi-Color’s revenue in fiscal 2008, and 14% of revenue in fiscal 2012. Sales to Miller Energy Resources Inc (NYSE:MILL) provided 18% of Multi-Color’s revenue in fiscal 2008, and 4% of revenue in fiscal 2012. Multi-Color greatly expanded its customer base when it bought the Australian label maker Collotype back in 2008.
International presence
The Collotype acquisition opened up international markets for this label maker. Multi-Color Corporation (NASDAQ:LABL) gained label making operations in Australia and South Africa with the purchase. The label maker followed up with acquisitions that increased its reach on other continents. Multi-Color bought European label makers Guidotti CentroStampa and Monroe Etiquette in 2010. In 2011, Multi-Color bought La Cromografica, York Label Group, and Warszawski Dom Handlowy. The label maker also made an acquisition in Chile and an acquisition in Argentina during the year.
Packaged goods need labels, but there’s a limit on how much a product like laundry detergent or hand soap can fetch at the supermarket. To achieve higher margins on labels, Multi-Color Corporation (NASDAQ:LABL) needed to get its labels on more valuable products. Wine and spirits offered compelling opportunities. Quality alcoholic beverages can fetch high prices with the right presentation. A label might be the only piece of information a shopper sees while considering an expensive bottle of wine, so a company that can make impressive wine labels has a great sales pitch. Multi-Color’s operating margin increased from 8.3% in fiscal 2008 to 10.7% in fiscal 2013.
Valuation
Multi-Color Corporation (NASDAQ:LABL) may be a better deal right now than the consumer products giants that buy its labels. The label maker has a forward P/E of 13. Procter & Gamble has a forward P/E of 18, while Colgate-Palmolive has a forward P/E of 19. Multi-Color’s 1.03 PEG ratio also comes out lower than Procter & Gamble’s 2.57 PEG ratio and Colgate-Palmolive’s 2.30 PEG ratio, using the statistics at Yahoo! Finance. The label maker does have a lower forward yield at 0.7% than Colgate-Palmolive at 2.2% and Procter & Gamble at 3%, though. Multi-Color offers an opportunity to trade dividends for growth while staying in the defensive consumer products business.
Risks
With customers like Procter & Gamble and Colgate-Palmolive, Multi-Color’s not very vulnerable to a recession. Multi-Color Corporation (NASDAQ:LABL) released a relatively upbeat 2009 annual report when other companies struggled. The label maker’s acquisition strategy does have risks, though. At the end of fiscal 2012, Multi-Color reported $342 million of goodwill and $117 million of intangible assets on its balance sheet, and $810 million in total assets. Multi-Color hasn’t released its 10-K for fiscal 2013 yet.
Multi-Color may also need to buy smaller label makers to maintain its sales growth. The label maker reported that its sales rose by $149.6 million in fiscal 2013, but acquisitions and start-ups were responsible for $139.7 million of this sales increase.
Takeaway
Multi-Color’s expansion strategy has opened up international markets, improved its margins, and reduced its dependence on its main customers. The company’s wine label maker acquisitions also make a lot of sense, because Multi-Color’s labeling expertise could make a big difference for a winery. The label maker’s balance sheet and organic growth figures highlight potential risks, but the company still looks like it’s worth it. Multi-Color had a five star CAPS rating and unanimous approval from CAPS all star members on May 23, 2013. This label maker’s strategy looks like it’s paying off.
Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble.
The article A World Full of Labels originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
