Amcor a BUY for IML's Daniel Moore as he looks to second half improvement

Reporting season is all about expectations. Whilst headline numbers can look great, if a company fails to live up to lofty expectations, the share price will fall. Equally, if a company is expected to report a soft result, but doesn't have a blowout, the share price can rise. 

That's what we've seen with Amcor (ASX: AMC) post results. According to IML's Daniel Moore, the company's Q2 results yesterday weren't strong, "but that was expected". The key was that they weren't worse than expected, and there were enough positives for the market to respond positively and push the share price higher. 

The question begs, however, "Where to from here?" In the interview below, Moore outlines the key factors investors should be paying attention to as the story unfolds, what needs to go right for the company to re-rate, and where the thesis could be challenged. 

Key numbers - Amcor Q2 earnings

• Q2 adjusted EPS $0.86 vs expectations of $0.85
• Revenue $5.45 billion vs expectations of $5.51 billion
• Adjusted EBIT $603 million vs expectations of $638.3 million
• DPS $0.65 vs year-ago $0.6375; record 25-Feb, payable 17-Mar

• Adjusted EPS $4.00-4.15 vs expectations of $4.00
• Free cash flow $1.8-1.9 billion vs expectations of $1.70 billion

Notes

• Core volumes remain soft, with ongoing pressure on Flexibles EBIT
• FY26 guidance reiterated, though the quality of the earnings beat looks cost-driven rather than volume-led
• Synergy delivery again came in above expectations, supporting near-term earnings momentum
• Free cash flow execution and leverage remain the key risks to the downside
• Of the 22 sell-side ratings, 82% BUY, 18% HOLD, no SELL
• The average target is to A$76.45, implying 17.1% upside

Do you currently hold Amcor and what is your rating?

Yes, we own it, and it's a BUY rating for us.

What matters from the results?

• We look at the organic volume performance of the business, which has been weak due to the weak US and European consumer; volumes are down 2%. 
• We look at the synergy delivery from their recent acquisition, the Berry acquisition, which was positive. That was at the top end of their guidance.
• And then we look at the cashflow and debt levels, which are elevated at the moment. The cash flow was seasonally weak in the first half. However, they're guiding to a much better cash performance in the second half. 

How do those outcomes affect the outlook?

It wasn't a strong result, but that was expected. The share price has rallied because it was priced for a bad result. So because it wasn't worse, it improved, and the share price went up. 

In addition, one of their key customers, Pepsi, reported overnight, and they said they were going to be more price-competitive with their products. So that's giving Amcor a bit of an improved volume outlook, potentially

What should investors be paying attention to as the story unfolds?

I think the volume growth is the key. It has been negative. In the second half of the year, they're going to be cycling easy comps, and their key customers are looking to improve their price competitiveness. 

So we'd like to see volume start to turn positive, which I think is really important for the rerating of the stock. 

Regarding the synergy delivery, we're quite hopeful they might upgrade the synergy targets. 

And then seeing that strong cash flow come through to pay down the debt, we're expecting that to come through in the second half. We think that if all those things are delivered, the stock should rerate.

What could you be wrong about?

If the volume growth doesn't materialise, that would indicate there's a bit of a structural issue. So if we're not seeing a recovery in volumes, then that may indicate Amcor is underperforming for some structural reason. 

Maybe it's that product category or their packaging is structurally in decline, or that their pricing is too aggressive and they're losing market share. So that's the key for us.