On Dec 6, we maintained our Neutral recommendation on Ball Corporation (BLL), based on expected benefits from increased capacity in the Alagoinhas plant, the acquisition of Envases del Plata S.A. de C.V and cost cutting measures. However, loss of customers, continued weak demand for 12 ounce cans, and impact of government spending cuts on the Aerospace and Technologies segment remain concerns for this manufacturer of metal and plastic packaging for beverages and foods.
Why Reiterated?
Ball Corporation’s third-quarter 2013 adjusted earnings of $1.00 per share increased 11% year over year, led by better-than-expected global beverage can volumes and an improved seasonal vegetable harvest. However, total revenue in the third quarter remained flat year on year at $2.28 billion.
The Brazilian can market grew approximately 10% in 2012, and demand is expected to continue to increase. In Brazil, Ball’s joint venture metal beverage can plant in Alagoinhas, which began production earlier in 2012, completed installation of a second can line that is capable of manufacturing multiple can sizes. This increased capacity will help the company to capitalize on the increased demand, spurred by the upcoming soccer World Cup in Brazil.
In December, Ball acquired Envases del Plata S.A. de C.V., a leading producer of extruded aluminium aerosol packaging in Mexico. Demand for extruded aluminum packaging for personal care products continues to increase; thus providing new opportunities for Ball’s growing business.
In November, Ball Corporation announced the closure of steel aerosol packaging manufacturing plant in Danville, Ill. Earlier in February, the company announced that it will close its Elgin, Ill., food and household products packaging facility in Dec 2013. These closures are consistent with the company's strategy to maintain an efficient manufacturing footprint and reduce costs. Ball has also initiated cost cutting measures in Europe, the benefits of which are expected to be realized in 2014 and 2015.
On the flipside, late in the second quarter of 2012, Ball was notified by a customer about its intent to source 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 about its decision to shift to a new supplier, effective 2015. This loss of customers will weigh on Ball’s results as well as dampen investor sentiment.
Ball Corporation’s Americas & Asia beverage results in the first nine months of 2013 were negatively affected by continued weak demand for 12 ounce cans in North America. In response to a slowing demand, Ball Corporation ceased production at its plants in Milwaukee, Wisconsin, Columbus, Ohio, and Gainesville, Florida.
Ball Corporation’s Aerospace and Technologies segment’s sales declined 1% in the third quarter as a result of the government shutdown and sequestration. This compared unfavourably to the 15% and 8% increase in the first and second quarters of 2013. Ball indicated that some projects have been put on hold or decision making is slow following government spending cuts. This will remain a headwind for the segment. Henceforth, the company should reduce its dependency on the U.S. government funding.
Other Stocks to Consider
Ball Corporation retains a short-term Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Sealed Air Corp. (SEE), Packaging Corporation of America (PKG) and UFP Technologies, Inc. (UFPT). All these stocks hold a Zacks Rank #2 (Buy).
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