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Ball Corp Bets on Beverage Can Demand, FX Woes Remain

Zacks Equity Research

On May 7, we issued an updated research report on Ball Corporation BLL. The company is likely to benefit from rising overall global beverage can demand, lower debt level, strong backlog in the aerospace segment and focus on cost-cutting actions.

Let’s illustrate these factors in detail.

Global Beverage Can Demand to Sustain Growth

In the first quarter of 2019, overall global beverage can demand rose more than 8%, levels not seen in a long time. Customers are now preferring cans over glass and plastic. Ball Corporation remains well poised to meet this growing demand. The company remains actively focused on expanding geographic footprint, aligning with the right customers and markets, growing with new products and capabilities, and leveraging technical know-how. The company anticipates capital spending to be $600 million in 2019.

It reaffirmed comparable EBITDA guidance of $2 billion and expects free cash flow of more than $1 billion in 2019, backed by continued strong demand for aluminum packaging and robust aerospace backlog. For 2019, contributions from its new lines, year-over-year impact of SG&A improvement undertaken in 2018 and plant cost initiatives will bolster earnings growth and margin expansion in 2019. In 2019 and beyond, the company anticipates earnings per share to be up 10-15%.

Ball Corporation continues to execute its strategies of achieving better value for standard products and higher growth for specialty products. Specialty cans now represent over 43% of its mix compared with 30% in 2016. The company focuses on pursuing cost-out programs, completing growth capital projects and commercializing on the inherent sustainability attributes of metal packaging, which will benefit it in the days ahead. Further, it is initiating additional products to expand aerospace infrastructure and testing capabilities.

Segments Poised for Growth

Ball Corporation’s North American segment is expected to benefit from fixed cost savings associated with the North American optimization program, volume growth, improved aluminum can sheet quality and reduce start-up costs in 2019 and beyond. The South American industry trends remain strong, with cans being the favored package in the beer, tea, energy and hard alcohol categories. Further, the expansions in Paraguay remain on track while the ones in Argentina and Chile are already contributing to the segment’s growth.

The company’s aerospace business continues to deliver higher revenues and operating earnings in the fourth quarter, driven by solid contract performance. Aerospace is poised to witness revenue growth of over 15% in 2019. With contracted backlog levels of $2.1 billion at the end of first quarter of 2019 and won-not-booked backlog at $4.9 billion, the future looks brighter for aerospace over the next three to five years.

Headwinds to Counter

Headwinds related to currency, higher freight rates and depressed market for scrap aluminum are likely to affect Ball Corporation’s results. Further, the company encountered manufacturing inefficiencies at its new Goodyear, AZ factory during the first quarter of 2019. In particular, the company incurred unplanned downtime owing to the number of changeovers as well as elevated logistics costs to meet growing demand. Taking into account the start-up headwinds, Ball Corporation will fall short of its targeted $50 million in total savings from the factory in 2019.

Price Performance

Ball Corporation's shares have surged 63% over the past year compared with the industry’s growth of 42%.

Zacks Rank & Key Picks

Ball Corporation carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Industrial Products sector are DMC Global Inc. BOOM, Lawson Products, Inc. LAWS and DXP Enterprises, Inc. DXPE, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DMC Global has an estimated earnings growth rate of 77.3% for the ongoing year. The company’s shares have soared 76.6% in the past year.

Lawson Products has a stellar expected earnings growth rate of 102.5% for the current year. The stock has appreciated 42% in a year’s time.

DXP Enterprises has a projected earnings growth rate of 21.6% for 2019. The company’s shares have gained 14.3% over the past year.

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