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O-I Glass (OI) Down 31% in 2019: Can It Rebound This Year?

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Shares of O-I Glass, Inc. (OI - Free Report) had an unimpressive 2019. Notably, the stock plunged 31% in 2019, compared with the industry’s decline of 22%. This can primarily be attributed to the ongoing decline of beer consumption in the domestic markets. Moreover, a muted outlook reflecting the impact of unfavorable foreign currency, capacity curtailments in the wake of lower demand weighed on the shares.
What’s Affecting OI-Glass?
The continued decline of beer consumption in the domestic market since 2018 remains a major headwind for this manufacturer of glass containers. In Americas, total glass container shipments were down approximately 1% in the first nine months of 2019 from the prior-year period. The company also witnessed lower demand in China. Overall, O-I Glass anticipates volume to decline 1% in 2019.

O-I Glass consequently reported year-over-year decline in earnings of 14%, 10% and 28% in the first, second and third quarter of 2019 respectively. The Zacks Consensus Estimate for fourth-quarter earnings (to be reported on Feb 5, 2020) is currently pegged at 47 cents, suggesting a decline of 23% from the year-ago quarter. O-I Glass’ adjusted earnings per guidance for 2019 is at $2.20-$2.25. The mid-point of the guidance reflects a year-over-year fall of 18%.

The company is undergoing capacity curtailment to balance supply with lower demand. It is also 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 impacted. Further, commissioning new capacity for future growth has added more cost than originally anticipated.

Factors to Buoy O-I Glass in 2020
In third-quarter 2019, O-I Glass 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 the company’s operating efficiency, cost structure and working capital management. The accelerated cost reduction initiatives and ongoing TSC program will reduce structural costs, thereby lifting margins. The company is reviewing strategic alternatives for Australia and New Zealand operations.

Meanwhile, the company is also driving innovation in the glass segment as evident from the development of MAGMA, a revolutionary breakthrough initiative to reimagine glassmaking with transformational technology and new processes. MAGMA remains a top priority for the company and the first shipments from the Streator pilot plant marked an important milestone in the third quarter.

The next MAGMA line will be located in Holzminden, Germany to support R&D efforts and provide incremental supply to growing segments. Additionally, it recently launched O-I : Expressions, a direct-to-glass digital printing technology that will enable brands to create highly personalized and customized glass packaging at affordable value. These innovations will open up new avenues for the company.

The company’s top priority remains investment in business. It intends to achieve this by investing in joint ventures and incremental capacity, and through bolt-on acquisitions in emerging geographies, while delivering a favorable return on invested capital. The initiation of a dividend last year and its share repurchase program demonstrates the company`s strong operating performance and sound balance sheet.

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, focusing on growing strategic relationships and footprint optimization poises it well for growing volumes and expanding margins in the region.

In the United States, non-beer categories in the United States continue to grow at low-single digits over time demand. Demand for glass is being supported by customers’ preference over plastic. Consequently, the company has focused on food, non-alcoholic beverages, and wine and spirits by improving customer relationships, commercial and design capabilities, and by converting almost 20% of its beer capacity into flexible capacity to meet non-beer customer demand. In Asia Pacific, benefits from the asset advancement program and growing demand in emerging markets will drive volumes, while efforts to lower structural costs will drive margins.

These factors will eventually benefit the company and lift the stock.

Zacks Rank & Stocks to Consider

O-I Glass currently has a Zacks Rank #5 (Strong Sell).

Meanwhile, investors interested in the industrial products space can consider better-ranked players like Lawson Products, Inc. LAWS, Hickok Inc. CRAWA and DXP Enterprises, Inc. DXPE. All of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Lawson Products has an expected earnings growth rate of 59% for the current year. The stock has surged 83% over the past year.

Hickok has a projected earnings growth rate of 12.2% for 2020. The company’s shares have gained 77% over the past year.

DXP Enterprises has an estimated earnings growth rate of 10.5% for the ongoing year. In a year’s time, the company’s shares have appreciated 21%.

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