On May 24, we maintained our Neutral recommendation on Owens-Illinois, Inc. (OI), based on expected benefits from its restructuring actions in the North American and Asia-Pacific regions, the multi-year asset optimization program in Europe, lower interest costs and a new furnace in Brazil which will lead to volume growth and logistics savings in the region. However, soft European economy, stiff competition from alternate packaging and high debt remain concerns for this manufacturer of glass containers.
Owens-Illinois’ first-quarter 2012 adjusted earnings per share declined 18% to 60 cents due to weak economic conditions in Europe, which offset improved operating profits in South America and Asia-Pacific.
Owens-Illinois will continue to benefit from the restructuring actions undertaken in North American and Asia-Pacific regions in 2012. Owens-Illinois has embarked on a multi-year asset optimization program in Europe, which includes elimination of underperforming assets, reduction of idle capacity and outlines investments in low cost additional capacity and enhancements in quality, speed and flexibility. The company expects to improve the long-term profitability of this region through this program over the next several years.
To partially lessen the capacity constraints in Brazil, Owens-Illinois completed the construction of a new furnace late in 2012. This has improved the company’s profitability in the region by lowering logistics costs and reduction in imports from other regions and will also contribute to volume growth in the region.
In the first quarter, Owens-Illinois retired EUR 300 million 2017 notes and issued EUR 330 million notes due in 2021. The company significantly extended its debt maturity schedule and lowered its interest rate for the next 8 years, which will aid margins.
On the flipside, given that 40% of Owens-Illinois’ business is in Europe, its results will continue to be impacted by the soft European economy till conditions improve. Owens-Illinois faces intense competition, not only from other well-established glass container manufacturers but also from manufacturers of alternative forms of packaging, such as aluminum cans and plastic containers. Furthermore, the company has a significant amount of debt, with a debt to capitalization ratio of 77% as of Mar 31, 2012.
Other Stocks to Consider
Other stocks in the containers industry that are currently performing well and have a good visibility include Berry Plastics Group, Inc. (BERY), Bemis Company, Inc. (BMS) and UFP Technologies, Inc. (UFPT) with a Zacks Rank #2 (Buy).
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