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On Sep 5, we upgraded our recommendation on Ball Corporation (BLL - Analyst Report) from Underperform to Neutral. The upgrade is based on expected benefits from expansion into regions like Brazil, strong backlog in its aerospace and technologies segment, and cost cutting initiatives.

However, this manufacturer of metal and plastic packaging, primarily for beverages and foods, may face headwinds like weak European economy, pricing pressure in China and the loss of customers.

Why Upgraded?

Ball Corporation’s aerospace and technologies segment ended the second quarter with solid contracted backlog of $966 million, which is close to the company’s record level of $1.1 billion. The momentum is expected to continue given the variety of opportunities present both domestically and internationally. This will contribute to the segment’s growth and help mitigate any effects of sequestration.

Going forward, Ball Corporation will continue to benefit from expansion in developing regions like Brazil. In Brazil, Ball’s joint venture metal beverage can plant in Alagoinhas, which began production earlier in 2012, is on track to start a second beverage can production line by the beginning of the fourth quarter of 2013. This increased capacity will help the company to capitalize on the increased demand spurred by the upcoming soccer World Cup in Brazil.

Ball Corporation has initiated cost cutting measures in Europe, the benefits of which are expected to be realized in 2014 and 2015. The company expects to bring its margins consistent with the 2010-2011 period, or in the range of 11% to 12%.

On the flipside, Ball was notified by a customer about its intent to source 12-ounce beverage cans from an alternative supplier, effective Jan 1, 2013.  Furthermore, in the first quarter of 2013, Ball was notified by a food can customer of their decision to shift buying from Ball to a new supplier, effective 2015.

This loss of customers will weigh on Ball’s results as well as dampen investor sentiment. Continued macro weakness in Europe and pricing pressure in China owing to the excess capacity in this region will also be a drag on Ball Corporation’s results.

Other Stocks to Consider

Sealed Air Corp. (SEE - Analyst Report), with a Zacks Rank #1 (Strong Buy), and Rock-Tenn Co. (RKT - Analyst Report) and PH Glatfelter Co. (GLT - Snapshot Report), carrying a Zacks Rank #2 (Buy), are some stocks worth considering.

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