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I Feel Bullish on Ball
Posted by: Victor Selva (IP Logged)
Date: March 21, 2014 04:40PM
Ball Corporation (BLL) is a supplier of metal packaging. The company produces steel food containers and steel and aluminum containers for beverages, food, personal care and household products, as well as steel paint cans, decorative steel tins and aluminum slugs. The company sells its packaging products mainly to beverage, food, personal care and household products companies. Also, the company’s aerospace business designs, develops and manufactures aerospace systems for civil, commercial and national security aerospace markets.
Opportunities to Invest
The company plans to manufacture different size beverage cans, especially in Europe, Asia and South America. It continues to streamline its beverage can end manufacturing business while planning the expansion in China, Brazil and Vietnam through new plants. Ball will continue expanding in developing markets such as Brazil. In fourth quarter 2013, the firm completed the installation of a second line in a manufacturing plant. 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. Demand is expected to continue increasing considering the upcoming soccer World Cup in Brazil and the Olympics games in the summer of 2014.
Divestitures, Acquisitions and Joint Ventures
In August 2010, Ball completed the sale of its plastic packaging business to Amcor Ltd. for $280 million. One month later, the company increased its stake in a Brazilian beverage packaging joint venture. In 2011, the firm acquired its partners' 60% interests in a former joint venture metal beverage can plant in China. In 2012, it acquired Envases del Plata S.A. de C.V., a leading producer of extruded aluminum aerosol packaging solutions in Mexico. All the acquisitions will provide the metal of new end markets.
Dividend & Share Repurchases
Looking at the financials, the company has a strong balance sheet: good cash that allows it to reward current shareholders through dividend and share repurchases. In 2013, Ball generated free cash flow of $461 million and for 2014 is going to be around $550 million after capital expenditures of approx. $375 million. Dividend-payment history affirms its commitment to maximize shareholder wealth. Dividends have been paid since 1958. Furthermore, the company sanctioned a new share repurchase program to buy back up to 20 million shares.
In terms of valuation, the stock sells at a trailing P/E of 19.8x, trading at a premium compared to an average of 15.8x for the industry. To use another metric, its price-to-book ratio of 6.6x indicates a premium versus the industry average of 1.41x and the price-to-sales ratio of 0.9x is above the industry average of 0.78x. All the metrics indicate that the stock is relatively overvalued.
Earnings per share (EPS) increased by 118% in the most recent quarter compared to the same quarter a year ago (from $0.39 to $0.85). As a matter of fact, the firm is currently Zacks Rank # 1 – Strong Buy, and it also has a longer-term recommendation of “Outperform” (upgraded from Neutral). In the next graph we can see that it has demonstrated a positive trend in the last ten years and we include the stock price because EPS often lead the stock price movement.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. Anyway, it has a very good ratio as we are going to see. Let´s compare the current ratio with the peer group in the next table:
As outlined in this article, the strategic acquisitions will create a range of opportunities for Ball. Additionally, the installation of new plants will provide cost-effective access to key markets. Therefore, I feel bullish about this company’s future profitability.
According to Yahoo! Finance, the estimated one-year target share price is $54.67, so if you buy shares at current market price ($53.99), your return from price appreciation would be 1.2%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 13 cents per share each quarter, totalizing $0.52 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 1%. So the total expected return for investing in Ball is 2.2%.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Jim Simons (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have also invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Guru Discussed: Jim Simons: Current Portfolio, Stock Picks
Stocks Discussed: BLL, GEF, EVRY, MINI,
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