Fat Prophets take profits
While not many Members may own Amcor (NASDAQ, AMCR) an Australian based global packaging giant, we have been a long time holder of the company via our Australasian report. We included Amcor in our US portfolio due to the stock's US listing. However, Amcor is now delisting from the NASDAQ, so we are removing the company from our portfolio.
| "While Amcor is touted as a takeover target, we do not think this likelihood is enough reason to stay invested." |
The delisting is timely, as we recently recommended our Australasian Members to sell the stock. The reasons behind the sell recommendation relate to recent underperformance and uncertain outlook for the company.
Lengthy periods of underperformance don't usually concern us. It is a simple fact of investing that stocks will go through stages of outperformance and underperformance. The trick is to assess which companies are just 'resting' before their next advance, while weeding out those in more serious trouble.
This has been a difficult task with respect to Amcor. Amcor is one of the world's largest paper and packaging companies and owns a valuable suite of assets. The problem has been that the industry Amcor operates in suffers from over capacity and structural inefficiencies.
This has resulted in the company embarking on a number of restructuring programs over recent years, which nearly always result in write-downs and restructuring charges. The capital intensive nature of the industry means shareholder funds are constantly required to maintain operations.
CEO Ken MacKenzie arrived on the scene in 2005 and soon began executing a large restructuring program, which is still underway. We were willing to give the restructuring plan time to bear fruit and after a tough 2005 and 2006, the market appeared to be coming around to the Amcor story.
At the time of our last review in March (FAT60), there had been a number of positive developments on the Amcor charts. Prices had lifted above a five-month consolidation range and almost simultaneously broke above long-term trendline resistance. The increase in volume accompanying the lift in prices was suggestive of growing investor support for the stock.
However, over the past two months, Amcor has slipped back from the highs achieved in April. As shown on the chart, the price action has been poor in recent weeks.
In addition to a less-than-favourable charting outlook, we also have some fundamental concerns. Specifically, energy prices are beginning to pick up again, and this poses a risk for Amcor's energy intensive operations. Moreover, the company's debt levels pose a risk given the higher interest rate environment.
In short, we are concerned that full year results may disappoint, placing further pressure on the stock. While Amcor is touted as a takeover target, this likelihood is not enough reason to stay invested. The company remains highly geared and in our opinion, not an attractive target for a leveraged takeover.
Given the uncertain outlook and the fact that Amcor is set to delist from the NASDAQ, we recommend Members sell the stock around $23.83. Amcor will be removed from the Fat Prophets portfolio.
DISCLAIMER
Fat Prophets has made every effort to ensure the reliability of the views and recommendations expressed in the reports published on its websites. Fat Prophets research is based upon information known to us or which was obtained from sources which we believed to be reliable and accurate at time of publication. However, like the markets, we are not perfect.
This report is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore discuss, with their financial planner or advisor, the merits of each recommendation for their own specific circumstances and realise that not all investments will be appropriate for all subscribers.
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As at the date at the top of this page, Directors and/or associates of the Fat Prophets Group of Companies currently hold positions in ABB Grain (ABB), Aurora Minerals (ARM), Austal (ASB), Australian Wealth Management (AUW), Avoca Resources (AVO), Avexa (AVX), Argo Exploration (AXT), BHP Billiton (BHP), Babcock & Brown Japan Property Trust (BJT), Boart Longyear (BLY), Biota Holdings (BTA), Catalpa Resources (CAH), Catalpa Resource Options (CAHO), Coeur D'Alene Mines (CXC), Fat Prophets (FAT), Fat Prophets Options (FATO), Fosters Group (FGL), Global Mining Investments (GMI), Lihir Gold (LGL), Lion Selection (LST), Macarthur Coal (MCC), Maryborough Sugar Factory (MSF), Mundo Minerals (MUN), Mineral Securities (MXX), Mineral Securities Options (MXXO), Newmont Mining (NEM), Oil Search (OSH), Oz Minerals (OZL), Progen Options (PGLO), Platinum Australia (PLA), QBE Insurance (QBE), Rio Tinto (RIO), Roc Oil (ROC), St Barbara (SBM), Sirtex Medical (SRX), Territory Iron Ord (TFE), Telstra Corporation (TLS), Tox Free Solutions (TOX), View Resources (VRE), View Resources Options (VREO), Walter Diversified (WDS), Woodside Petroleum (WPL), Merrill Lynch Gold Fund, Platinum Japan Fund, Gold Bullion. These may change without notice and should not be taken as recommendations.
The above disclaimer does not apply to investments held by the Fat Prophets Australia Fund Limited ACN 111 772 359 (FPAFL).