KeyBanc Peels Back February Upgrade Of Multi-Color

KeyBanc Capital Markets upgraded Multi-Color Corporation LABL in February, but the research firm said a shift back to a bearish stance on the labelmaker is warranted.

The Analyst

Analyst Adam Josephson downgraded Multi-Color from Sector Weight to Underweight with a new $57 price target.

The Thesis

KeyBanc's February upgrade of Multi-Color came due to valuation reasons, but the Constantia business it acquired in late 2017 has continued to underperform expectations, Josephson said in the downgrade note. (See the analyst's track record here.) 

The weakness resulted in the company's total margins falling from around 18 percent at the time of the acquisition to around 17-18 percent, the analyst said. The gross margin has fallen from 22 percent in the legacy company in the second quarter to just 16 percent.

Multi-Color's management said during the second-quarter conference call that it expects the Constantia business to grow at a notably slower rate of around 2 percent versus the legacy business's growth rate of 4 percent, Josephson said. 

Multi-Color's 2011 acquisition of York Label Group presented the company with similar woes and resulted in an EPS miss in five of the first seven quarters since the acquisition closed, the analyst said. It may be reasonable to assume similar trends will play out again, with the company unlikely to hit its $5 EPS target in fiscal 2020, he said. 

Price Action

Multi-Color shares were down 5 percent at $60.65 at the time of publication Thursday. 

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