Note: This report contains substantially new material. Subsequent reports will have new or revised materials highlighted.
Reason for Report: 3Q17 Earnings Update.
Previous Edition: 1Q17 Earnings Update; Jun 17, 2017.
Brokers’ Recommendations: Positive: 83.33% (10 firms): Neutral: 8.33 % (1); Negative: 8.34% (1) Prev. Ed.: 6; 3; 0
Brokers’ Target Price: $45.44 (↑ $1.11 from the last edition; 9 firms) Brokers’ Avg. Expected Return: 21.3%
Portfolio Manager Executive Summary
Ball Corporation's (BLL or the company) principal activities include manufacturing metal packaging, primarily for beverages and foods, and supplying aerospace and other technologies, and rendering services to government and commercial customers.
Of the twelve firms in the Zacks Digest Group covering the stock, ten assigned positive ratings and 3 conferred neutral ratings and three firms rendered a negative rating to the stock. Nine firms provided target prices.
Buy or equivalent outlook– (10/12 firms or 83.33%): The bullish firms expect Ball Corporation to benefit from expansion in international markets, productivity-enhancement programs and increasing non-beverage can-related production. Increased productivity at the company’s Monterrey, Mexico facility and initial production from a new plant in Myanmar will aid the company’s results in the near term. Further, significant changes in the U.S. budgetary process will boost contract wins. Its ongoing capacity optimization program will boost performance in the near term. Also, improving manufacturing metrics and the ramping up of the new aluminum aerosol capacity in Europe and India will drive growth.
Neutral or equivalent outlook – (1/12 firms or 33.33%): The neutral firm believes Ball Corporation will benefit from favorable demand trends of global beverage cans backed by growth of imported beer and the favorable substrate shift (from bottles to cans). According to the firms, Ball Corporation’s commitment to its long-term strategies will also drive growth. Per the firm, the company’s successful execution of capital projects, robust backlog growth and focus on cost optimization will prove conducive to growth. Further, increase in price mix and footprint rationalization remain tailwinds. However, volatility in the Middle Eastern beverage can business pose threats to the company.
Negative or equivalent outlook – (1/12 firms or 8.33%): The firm with negative outlook believes Ball Corporation will bear the brunt of elevated raw-material prices, volume deceleration and unfavorable foreign exchange. Pricing pressure in China also remains headwind.
Feb 2, 2018
Overview
Headquartered in Broomfield, CO, Ball Corporation (BLL or the Company) is a supplier of high-quality metal packaging for beverage, food and household products customers. The company also owns Ball Aerospace & Technologies Corporation, which supplies aerospace and other technologies and services to government and commercial customers. The majority of sales in this segment come from longer-term contracts, which would generally last from one to five years. The Company operates through North American and Asian Packaging, Metal Beverage Packaging, and Aerospace and Technologies. The North American and Asian Packaging segment manufactures and sells aluminum, steel, and polyethylene terephthalate (PET) containers, primarily for beverages and foods. The Metal Beverage packaging segment manufactures and sells metal beverage container products in Europe. The Aerospace and Technologies segment includes defense systems, civil space systems, and commercial space operations.
Further information can be found at the Company’s website at: http://www.ball.com/.
Key Positive Arguments / Key Negative ArgumentsGrowth Prospects: The Drive for 10 vision strategy will aid business growth and long-term success. / Unfavorable Foreign Exchange: Unfavorable foreign exchange and pricing pressure in China remain threats for the company.
Financials: Strong cash flow generation provides Ball Corporation the opportunity to lower its debt and interest costs, while increasing its potential for share repurchases, acquisitions, and/or higher dividends. Focus on free cash flow generation and increase in EVA dollars will drive growth.
/ Margins: Rising costs of raw material (steel, aluminum and resin) could adversely impact Ball Corporation’s margins.
Strong Management: Experienced management team with reputation for successfully purchasing and integrating attractive assets is an added advantage. / Weak Global Economy: The prevalent global economic weakness may lead to a lack of demand for Ball Corporation’s products.
NOTE: The company’s fiscal year coincides with the calendar year.
Feb 2, 2018
Long-Term Growth
According to analysts, Ball Corporation’s long-term growth rate depends on expansion in the beverage can industry in North America and Europe.
Overall, the firms noted that Ball Corporation’s long-term prospects are promising. The company remains committed to its Drive for 10 vision strategy which will aid business growth and long-term success. The initiative encompasses five strategic levers comprising value maximization of existing businesses, expansion of new products and capabilities, alignment with the right customers and markets, geographic expansion, and leveraging know-how and technological expertise to provide a competitive advantage. Ball Corporation’s new facilities and increase in capacity will improve growth opportunities in the coming years.
In June 2016, Ball Corporation successfully closed the acquisition of Rexam for approximately $6.1 billion of cash and equity, along with the assumption of approximately $2.4 billion of net debt. It expects to gain over $300-million synergies by the end of 2019. The buyout will create long-term value for Ball Corporation’s shareholders. Moreover, the acquisition is expected to be accretive to earnings over the long term.
Ball Corporation will also benefit from its focus on free cash flow generation and increase in EVA dollars. However, the firms believe unfavorable foreign exchange and pricing pressure in China remain threats for the company. Higher raw material prices (steel, aluminum, resin), continued weakness at the end-market level (CSD, beer, and food), and volume share shifts in a brutally competitive industry can prove to be hurdles.
Feb 2, 2018
Target Price/Valuation
A summary of target price/valuation as compiled by Zacks Research Digest is as follows:
Rating and Valuation DistributionPositive / 83.33%↑
Neutral / 8.33%↓
Negative / 8.34%
Avg. Target Price / $44.33↓
Digest High / $50.00↑
Digest Low / $36.00↓
No. of Firms with Target Price/Total / 9/12
Risks to the target price are higher raw material prices, including that of steel, aluminum and resin, shift in volumes in the cut-throat competitive environment, and shift in currency or pricing of metal. Also, pressure on pricing in China remains a threat for the company.
Recent Events
On Jan 25, 2018, Ball Corporation declared a cash dividend of 10 cents per share, payable Mar 15, 2018, to shareholders of record as of Mar 1, 2018.
On Nov 20, 2017, Ball Corporation announced that the Joint Polar Satellite System-1 (JPSS-1) has been successfully launched from the Vandenberg Air Force Base, CA. The JPSS-1 will join the Ball Corporation-built, Suomi National Polar-orbiting Partnership (Suomi NPP) after reaching its polar orbit. The information collected from JPSS-1 next-generation suite of instruments will deliver advanced data and will provide global observations for U.S. weather and environmental predictions.
On Nov 9, 2017, Ball Corporation announced that Joint Polar Satellite System-1 (JPSS-1) is ready to be launched from the Space Launch Complex-2W at Vandenberg Air Force Base, CA, on Nov 14, 2017. JPSS-1 is the first operational version of the next-generation satellites to be managed by the National Oceanic and Atmospheric Administration (NOAA), with National Aeronautics and Space Administration (NASA) as the program’s procurement agency. The satellite bus has been designed and built by Ball Corporation in accordance with its contract with NASA’s Goddard Space Flight Center.
On Nov 2, 2017, Ball Corporation reported 3Q17 adjusted earnings of 52 cents per share, which increased around 8.3% year over year (y-o-y). The figure, however, missed the Zacks Consensus Estimate of 59 cents. On a reported basis, the company posted earnings of 13 cents per share compared to 9 cents per share in the prior-year quarter. Total revenues grew 5.7% y-o-y to $2.908 billion in the reported quarter. Nonetheless, the figure fell short of the Zacks Consensus Estimate of $2.942 billion.
Revenue
Ball Corporation reported revenues of $2,908 million in 3Q17 compared with $2,752 million generated in 3Q16.
Segment Details
Metal Beverage Packaging, North and Central America: The segment reported revenues of $1,080 million in 3Q17 compared to $1,076 million in the year-ago quarter.
Metal Beverage Packaging, Europe: The segment’s revenues jumped 4.3% y-o-y to $651 million in the reported quarter.
Beverage packaging, South America: The segment’s revenues surged 33.6% y-o-y to $425 million in the quarter.
Food and Aerosol Packaging: The segment’s sales came in at $321 million, which declined 2.4% y-o-y.
Aerospace: Revenues of the segment jumped 18% y-o-y to $241 million in 3Q17.
Outlook
The firms with a positive stance believe the Rexam acquisition will place the company in a better position to serve the combined customer base through supply-chain efficiency, manufacturing excellence and improved product innovation. Additionally, Ball Corporation’s ongoing capacity-optimization program will stoke growth in the near term.
According to the neutral firm, the company’s successful execution of capital projects, robust backlog growth, increase in price mix and footprint rationalization remain tailwinds. Per the firm, the company is likely to benefit from diversified geographic footprint and a more distributed production base.
Firm with negative outlook expects volatility in the Middle Eastern beverage can business remain headwinds.
Margins
The company reported cost of sales of $2,338 million in 3Q17 compared with $2,275 million recorded in 3Q16. Selling, general and administrative expenses as reported by the company amounted to $127 million in 3Q17 compared with $135 million recorded in 3Q16. Ball Corporation also recorded adjusted operating income of $313 million in the quarter compared with $311 million in the prior-year quarter. The company reported net earnings of $51 million in 3Q17 compared with $34 million in 3Q16.
Segment Details
Metal Beverage Packaging, North and Central America: The segment’s operating profit of $121 million in the quarter decreased 16.6% y-o-y, impacted by unplanned operational and logistics costs associated with two U.S. hurricanes.
Metal Beverage Packaging, Europe: The segment’s operating profit increased 2.8% y-o-y to $74 million in the quarter.
Beverage packaging, South America: The segment recorded operating earnings of $78 million, substantially up from $60 million recorded in the year-earlier quarter.
Food and Aerosol Packaging: Operating income of the segment went down 3.2% to $30 million in the quarter due to double-digit U.S. food can volume declines driven by delayed Midwest corn and tomato packs, and lower consumer demand for canned food.
Aerospace: This segment’s operating income decreased 4.2% to $23 million from $24 million recorded in the year-ago quarter. The segment had a backlog of $1.2 billion at the end of 3Q17.
Outlook
One of the firms with a bullish outlook increased margin estimates based on Ball Corporation’s focus on its cost-reduction program. Bullish firms anticipate the ongoing capacity-optimization program in beverage cans to aid margin expansion.
The neutral firms believe Ball Corporation will benefit from significant changes in the U.S. budgetary process which will boost contract wins. On the other hand, aluminum exposure and pricing pressure in China are expected to dent the company’s margins.
Earnings per Share
Ball Corporation posted 3Q17 adjusted earnings of 52 cents per share, up 8.3% y-o-y. On a reported basis, the company posted earnings of 13 cents per share compared with 9 cents per share in the comparable quarter last year.
Outlook
According to the bullish firms, Ball Corporation is well poised to benefit from favorable demand trends of global beverage cans backed by growth of imported beer and a favorable substrate shift. Further, improving manufacturing metrics and the ramping up of new aluminum aerosol capacity in Europe and India will drive growth.
According to the neutral firm, Ball Corporation will benefit from focus on free cash flow generation, earnings growth and robust backlog. The firm believes international market expansion, productivity enhancement programs and increasing non-beverage can related production will drive results.
According to the firm with negative outlook, elevated raw material prices, volume deceleration and an unfavorable foreign exchange pose threats to the company.
Feb 2, 2018
Analyst / Riya DharCopy Editor / Deblina Halder
Content Ed. / Madhurima Das
Lead Analyst / Madhurima Das
QCA / Anindya Barman
No. of brokers reported/Total brokers / 9/9
Reason for Update / Earnings
Zacks Investment Research Page 6 www.zackspro.com