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Owens-Illinois to Sell 25% Stake in Tata Chemicals Partners

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Owens-Illinois, Inc. OI recently announced that it intends to sell its 25% stake in Tata Chemicals (Soda Ash) Partners Holdings for $195 million of cash. The cash proceeds will be utilized to repay the company’s outstanding debt. This move is in sync with the company’s on-going tactical divestiture program that is expected to generate total proceeds of $400-$500 million.

The sale will be made to Valley Holdings, Inc., a wholly-owned subsidiary of Tata Chemicals Limited.

In third-quarter 2019, Owen-Illinois set upon a strategic review of its business portfolio and operating structure. This review is aimed at exploring options to maximize investor value and focuses on aligning the company’s business with demand trends. It is also striving to improve operating efficiency, cost structure and working capital management. The accelerated cost reduction initiatives and ongoing Total Systems Costs (TSC) program will reduce structural costs. The company is reviewing strategic alternatives for Australia and New Zealand operations.

The company plans additional asset sales in 2020. The proceeds from its strategic review will be utilized toward lowering debt and to focus on core operations. The company has a leverage target of 3.0x and has stalled its share repurchase program till its closer to the target.

Tepid Outlook for 2019

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. The company also witnessed lower demand in China and is undergoing capacity curtailment in China.

Reflecting softer demand, capacity curtailments, and unfavorable foreign currency translation, the company’s adjusted earnings per guidance for 2019 is at $2.20-$2.25. Owens-Illinois had reported earnings per share of $2.72 in 2018.

Poised Well for the Long Run

In the United States, demand for glass is growing, propelled by favorable consumer trends and increased preference of customers for glass packaging. Demand for non-beer customer continues to grow in low-single digits in the nation. Thus, the company is converting almost 20% of its beer capacity into flexible capacity to meet demand for non-beer categories. In the Asia Pacific, benefits from the asset-advancement program and growing demand in emerging markets will drive volumes, while efforts to lower structural costs will expand margins.

The company is also poised to benefit from focus on improving factory performance, cost reduction and innovations. Owens-Illinois’ remains committed to investing in business. The company continues to do so through in joint ventures (JV) and incremental capacity, and bolt-on acquisitions in emerging geographies. Owens-Illinois’ JV with Constellation Brands, Inc. (STZ - Free Report) and long-term sales contracts in Mexico is likely to mitigate the impact of the persistent decline in mega beer in the United States.

Price Performance

Shares of Owens-Illinois have plunged 28% in the past year compared with the industry’s cumulative decline of 11.3%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX and Tennant Company TNC. Both the stocks sport a Zacks Rank #1 (Strong Buy). 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 57% in a year’s time.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 559% over the past year.

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