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Owens-Illinois (OI) Hit by Weak Beer Demand in U.S. Markets

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On Nov 15, we issued an updated research report on Owens-Illinois, Inc. (OI - Free Report) . The company continues to bear the brunt of the persistent decline in beer consumption in the United States. Nevertheless, Owens-Illinois is focusing on improving factory performance, cost reduction and business portfolio optimization to sustain margins.

Soft Q3 Results

Owens-Illinois reported third-quarter 2019 adjusted earnings of 54 cents per share, a 28% decline from the prior-year quarter figure of 75 cents. Net sales declined 3.8% year over year to $1,670 million, as favorable pricing and contribution from the Nueva Fanal acquisition were offset by unfavorable currency translation and lower sales volume.

Global shipments were down 1% year over year in the reported quarter, reflecting slower market growth, particularly in Mexico and China and persistent weak demand for beer and non-alcoholic beverages in the United States.

Weak 2019 Outlook

The company plans to curtail capacity in the United States and Mexico in the ongoing quarter in response to lower sales. Owens-Illinois lowered adjusted earnings per guidance for 2019 to $2.20-$2.25 from $2.40-$2.55 thanks to softer demand, capacity curtailments, and unfavorable foreign currency translation. The mid-point of the guidance reflects a year-over-year decline of 18%. The lowered guidance also includes the impact of higher effective tax rate, and continued increased complexity.

The company is trying to counter the impact of mega-beer decline with new business in growing categories. While this new mix is positive from a volume and margin perspective in the long run, it is creating more operational complexity and costs are being affected. Further, commissioning new capacity for future growth has resulted in more costs than originally anticipated. The company is also undergoing capacity curtailment to balance supply with lower demand.

The Zacks Consensus Estimate for fiscal 2019 is currently pegged at $2.21, indicating a decline of 18.8% from the prior-year quarter. The estimate has also moved down 4% over the past 30 days. The Zacks Consensus Estimate for revenues is at $6.68 billion, suggesting a decline of 2.8% from the year-ago reported figure.

Sluggish U.S Beer Markets

The continued decline of beer consumption in the domestic market since 2018 remains a major headwind. In Americas, total glass container shipments in the region were down approximately 1% in the first nine months of 2019 compared with the prior-year period. Sales volumes were primarily affected by lower shipments to food and alcoholic beverage customers thanks to ongoing trends in beer shipments. The company also witnessed lower demand in China and is undergoing capacity curtailment in China.

Other Headwinds

The company expects 2019 asbestos-related payments to increase to approximately $160 million on account of its de-risking and accelerated claim disposition strategy. Moreover, though incremental investments in R&D will reap long-term benefits, it will impede margins in the near term.

Price Performance

Over the past year, Owens-Illinois’ shares have fallen 47.6% compared with the industry’s decline of 33.8%.

Zacks Rank & Key Picks

Owens-Illinois currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Casella Waste Systems, Inc. CWST. While Northwest Pipe and Tennant sport a Zacks Rank #1 (Strong Buy), Casella Waste Systems carries a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 39% in a year’s time.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 26% over the past year.

Casella Waste Systems has an estimated earnings growth rate of 37.7% for the ongoing year. The company’s shares have gained 33% in the past year.

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