Description

Another simple idea.

AMBP is a super highly levered aluminum can producer that came public via SPAC. Yes -- it's as horrible as it sounds. The stock has declined from $10 to $3.72 in just 2 years.

Long story short, AMBP is one of 3 companies that control most of the can industry. Vs CCK and BALL, it skews a bit more towards Europe. 

While this is an oligopoly industry with normally very stable end market demand, I would characterize it as a "decent but not great" industry. In practice, it's very capital intensive and faces powerful customers who wield substantial bargaining power. On the flip side, the can makers have scale / geographical advantages. If you look at BALL and CCK's histories, both have been decent investments in the long run.

A few years ago there was a huge narrative shift in this industry. It went from a somewhat boring LSD growth "value stock" type industry to sexy, ESG friendly, high growth. The bull story was something like this:

1. Can demand outstripping supply = cyclical boom

2. Can demand secularly growing -- as people switch from plastic towards recyclable products, and as niche categories (e.g. craft beer, selzers, energy drinks, La Croix, etc) use cans. These "long tail" or "non-standard" products (vs a Bud Light for instance) produce far higher ASP and margins.

While there was a lot of truth to this bull story, the thesis came to nought when:

1. Volume growth collapsed. In part because of high inflation (beverage demand is down as massive price hikes dampened volumes). But there's also been idiosyncratic issues in Europe and Brazil (macro/Russia).

2. Competition intensified. There's been a ton of new entrants with a few, like Canpack, considered "disruptive"

3. Giant raw materials / cost inflation, which is passed through on a lag

4. Industry participants built a ton of capacity in response to the "new narrative". The industry went from under supplied to overcapacity very quickly which resulted in negative operating leverage

All the stocks in this sector collapsed. Narratives are very dicey. But at the same time, the set up going forward seems interesting.

*Big picture note:  I've been of the opinion that in the current environment, when the macroeconomy seems on the edge of teetering over, I'd be better served via stocks ALREADY being crushed by cyclical forces, and ESPECIALLY inflationary forces. If the economy does roll over, I think these stocks are likely to outperform. This is part of the reason I'm looking at this space.

Anyhow, here's the set up:

1. There's been volume degradation and also de-stocking. But things appear to be bottoming out. Meanwhile, the secular bull thesis from a couple of years ago isn't dead, it's just hibernating.

2. Expect raw materials recovery going forward. Margins have bottomed. Look at recent earnings releases... AMBP "met" bad expectations, and BALL/CCK beat

3. Competitive environment easing up -- everybody cutting capex. Some older can lines to be mothballed. The Supply/demand balance is looking healthier. For AMBP in particular, it had some insane volume plans when it IPO'ed (50% volume increase in 4-5 years!). Now the company is saying "capex plans substantially complete". FCF will go up.

4. Brazil has been super painful for anyone with leverage to the region. But (famous last words) macro appears to be stabilizing. Inflation is down sharply and the central bank will soon be able to cut rates. 

So why did I write up AMBP and not CCK or BALL? I think all three are sort of similarly positioned. AMBP has probably the most reward (also probably riskiest given leverage). It's also got a healthy mix towards specialty and I think (?) highest margin leverage if the above thesis is correct, as its margins have been crushed. In reality I think all 3 are correlated and if the general thesis is correct, all will do fine.

If they remain disciplined on capex and if margins recover 200bps in the next 2 years, I have the stock with a levered FCF yield well into the teens. I'm not super concerned about the debt which is well termed to 2027+. There's ample liquidity. If the economy rolls over I think volumes will be relatively stable from here.

I will be wrong if volumes have further downside and there's more operational de-leveraging resulting in lower margins from here. You'd get a big drawdown in the stock.

Catalyst

Margin recovery