Cans company Rexam looks set to be a strong long-term performer.
I like Rexam
(LSE: REX)
. It's a consumer packaging company which generates plenty of cash and operates in a growing market. Best of all, its share price looks too low.
You might think packaging doesn't sound very sexy, but I see definite growth potential here. The average American consumed 375 cans in 2005 whereas the average European used just 75 cans. In emerging markets, the figures are even lower.
What's more, Rexam is coming up with some innovative ideas in cans and other forms of packaging. For instance, the new CapCan allows you to drink half a can, put the top back on and have the rest later. The new Sleek cans also look promising -- in the UK they're used to package the energy drink, Red Bull. New products help Rexam to maintain margins.
And Rexam doesn't just do cans. It also makes plastic packaging for cosmetics and pharmaceutical products. Plastic containers comprised 23% of sales in 2005.
First half results in the summer were impressive. Acquisitions helped sales to grow by 20%, and there was decent organic growth too at 9%. Rexam generates healthy amounts of cash. Operating cash flow came in at £112m.
Indeed I first took an interest in Rexam in May when I wrote about three cash flow winners in the FTSE 100. The share price has moved up a little since then, but I still think it's attractively priced today. At 556p, the company is valued at £3.24bn and trades on a price/earnings ratio of 13.5 for this year.
Admittedly, the company did issue a slightly downbeat trading statement last week. Anticipated launches for some cosmetic products haven't happened. However, the statement also said that Rexam still expected to meet market expectations for 2006, and I don't see this as a major worry.
Commodity prices is another issue. Rexam uses a lot of aluminium! Even if metals prices reach new peaks next year, I wouldn't be too concerned because I think Rexam has shown it can cope with rising costs. That said, falling commodity prices would be a nice bonus boost for the company.
Don't get me wrong. I'm not saying Rexam is a screaming bargain. But I think it should at least do as well as the Footsie over the next few years, and there's a decent chance it will do even better and be a market-beating stock. And you'll get a nice 3.4% yield too.
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