Favorable Markets to Drive Owens-Illinois, FX a Woe
On May 10, we issued an updated research report on Owens-Illinois, Inc. OI. Growing preference for glass packaging, continued focus on cost reduction and acquisitions is likely to drive growth for the company. Further, its ongoing successful joint venture (JV) with Constellation Brands, Inc. (STZ) and new capacity additions will aid growth. However, unfavorable foreign currency, persistent decline of beer consumption in the domestic market and high debt levels remain concerns.
Tepid Q1 But Poised for a Better 2019
Owens-Illinois reported first-quarter 2019 adjusted earnings of 51 cents per share which missed the Zacks Consensus Estimate of 53 cents. The bottom line also declined 14% from the prior-year quarter figure of 59 cents. Net sales declined 6% year over year to $1,638 million, as favorable pricing was offset by decline in shipments and unfavorable currency translation. The top line lagged the Zacks Consensus Estimate of $1,637 million.
Backed by favorable market trends, growth opportunities, and continued focus on structural cost reductions, the company anticipates higher earnings and cash flow generation in 2019 compared with the prior year. Owens-Illinois guides adjusted earnings to be around $3.00 per share, projecting year-over-year growth of 10% from 2018. Volume growth, improved pricing and cost performance augmented by strategic initiatives will drive earnings growth. It also includes the impact of ongoing share repurchases. Segment operating profit margin is projected to be 50 basis points higher. It anticipates growth of about 1.5% in volumes, a combination of core organic growth and new business from strategic customers.
Robust End Markets Bode Well
In Europe, wine sales will be higher in 2019 due to strong grape harvest in 2018. Further, glass packaging in Western Europe has been growing for last two years — in line with total packaging. Premium products in Europe are growing significantly faster than overall market. The company has been outperforming the European beer market over the past five years, and this trend is anticipated to continue. Overall the glass container market in Europe is healthy and continues to improve at about 1% per year. The company’s efforts to add capacity in Europe, supply chain performance, focus on growing strategic relationships and footprint optimization poises it well for improving volumes and expanding margins in the region.
Taking into account the rising market demand in Mexico and Brazil, the company is adding capacity. In the United States, demand for glass is improving on the back of favorable consumer trends and increased preference of customers for glass packaging. Non-beer categories in the United States continue to grow at low-single digits over time. Consequently, the company has been focusing on these categories by improving customer relationships, commercial and design capabilities, and converting almost 20% of its beer capacity into flexible capacity to meet non-beer customer demand. Overall, Americas are expected to generate higher sales, profit and margin in the coming year.
In Asia Pacific, growing demand in emerging markets will drive volumes. Owens-Illinois has completed its asset improvements program in the region, and expects higher volumes and lower manufacturing expense to drive margins higher going forward. Further, there exists opportunities to grow premium products in Australia and New Zealand markets.
Successful JV: A Key Catlyst
Owens-Illinois’ JV with Constellation Brands has exceeded expectations so far — productivity has been higher than anticipated, capital costs were considerably lesser than initially expected and earnings have been growing every year. The company has built four furnaces at the JV in just four years and is currently building a fifth furnace that is expected to come on line by 2019 end.
The fifth furnace will help cater to the rising demand from Constellation`s adjacent brewery. With the installation of the fifth furnace, the Nava plant will be the largest and most modern glass container factory globally. The total cost of approximately $140 million, will be financed by equal contributions from both partners.
Acquisitions to Support Growth
Owens-Illinois has acquired 49.7% interest in Empresas Comegua S.A. for $119 million from Fabricación de Máquinas, S.A. de C.V., a wholly owned subsidiary of Vitro, S.A.B. de C.V. Empresas Comegua S.A. is the leading manufacturer of glass containers, which operates two glass manufacturing facilities — one in Costa Rica and another in Guatemala. Empresas caters to the company’s global strategic customers and various segments, including food, soft drinks, beer, spirits and pharmaceuticals. The buyout will help Owens-Illinois expand presence into new and growing glass markets in Central America, and extend market presence in the Caribbean.
Owen-Illinois’ previous acquisition of Vitro's food and beverage business has provided the company a competitive edge in the attractive and growing glass segment of the packaging market in Mexico, further reinforcing its position as the world's leading glass container producer.
High Debt Levels, FX a Concern
Despite Owens-Illinois’ deleveraging and refinancing actions in the past 12 months, its debt-to-capitalization ratio remains high at 85%. Higher interest levels will impact margins. Further, its margins will bear the impact of the company’s incremental investments in R&D in the near term. Unfavorable foreign currency impact is also expected to affect the company’s earnings. Further, persistent decline in beer consumption in the domestic market remains a major headwind.
Share Price Performance
Shares of Owens-Illinois have dropped 7% in the past year, compared with the industry’s decline of 8%.
Zacks Rank and Stocks to Consider
Owens-Illinois 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 Roper Technologies, Inc. ROP, each sporting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
DMC Global has an estimated earnings growth rate of 79.7% for the ongoing year. The company’s shares have soared 69%, in the past year.
Lawson Products has a stellar expected earnings growth rate of 24.5% for the current year. The stock has appreciated 42% in a year’s time.
Roper Technologies has a projected earnings growth rate of 7.9% for 2019. The company’s shares have gained 28%, over the past year.
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