On Mar 5, we issued an updated research report on Owens-Illinois, Inc. (OI - Free Report
) . The company will benefit from its ongoing successful joint venture (“JV”) with Constellation Brands, Inc. (STZ - Free Report
) , growing preference for glass packaging, continued focus on cost reduction and acquisitions. However, unfavorable foreign currency, substantial freight inflation, persistent decline of beer consumption in the domestic market and high debt levels remain concerns.
Tepid Q1 But Poised for a Better 2019
The company expects earnings per share in the range of 50 cents to 55 cents in the first quarter of 2019 compared with 59 cents reported in year-ago quarter. Unfavorable foreign and lower sales volume in the Americas will impact earnings. The company also plans to spend higher on corporate expenses. Moreover, interest expenses are expected to be higher. Investments for growth will also weigh on the quarter, before yielding results in the second quarter and beyond.
Nevertheless, backed by favorable market trends, growth opportunities, and continued focus on structural cost reductions, the company expects higher earnings and cash flow generation in 2019. Owens-Illinois projects adjusted earnings to be around $3.00 per share, projecting year-over-year growth of 10% from $2.72 in 2018. It also includes the impact of ongoing share repurchases.
It anticipates growth of about 1.5% in volumes, a combination of core organic growth and new business from strategic customers. Owens-Illinois plans to add four new furnaces, seven new machines and several line conversions in 2019 to support volume growth.
Robust End Markets to Sustain Growth
In Europe, wine sales will be higher in 2019 due to the 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 expected to continue. Overall the glass container market in Europe is healthy and continues to grow 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.
Considering 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 with Constellation Brands to Drive Growth
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: A Key Catalyst
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 Owens-Illinois’ 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.
Few Headwinds Linger
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.
Owens-Illinois faces intense competition from manufacturers of alternative forms of packaging, such as aluminum cans and plastic containers. Advantages in price, quality, and functional attributes of these alternative containers may lead to customers considering a change of suppliers or the form of packaging, which could affect Owens-Illinois. Also, 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 10%.
Zacks Rank and Stocks to Consider
Owens-Illinois carries a Zacks Rank #3 (Hold).
Mueller Industries has an expected earnings growth rate of 2.2% for 2019.
Alarm.com has an expected earnings growth rate of 7.8% for the current year.
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