And if you’re not yet excited about the company, perhaps the opening headline from Morningstar will quickly reinvigorate your enthusiasm:
“Ball provides beverage cans for each of the 10 largest domestic craft breweries.”
From there you might dig a bit into the craft beer market. For instance, the craft brewing market grew by about 15% in each of the last two years, as compared to just 1% for the overall U.S. beer market. Or you could see that there were just 89 breweries around in 1980 while there are more than 2,500 today. Perhaps you would be interested to know that craft brews now represent 30% of Costco’s (COST) beer sales. You might have even picked up on the idea that there’s a movement in craft beers away from bottles towards cans.
Obviously the craft beer market for container makers might be a small portion of the company’s prospects, but it’s noticeable that markets like these can provide a growth thesis for an otherwise “boring” company. In fact, this type of company fits ideally with Peter Lynch’s first criteria for finding the perfect company:
“The perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name. The more boring it is, the better.”
Making containers and calling yourself “Ball Corporation” seems to fit the Peter Lynch bill reasonably well. Anyone want to learn how a can is made? But Ball Corp has some impressive stats behind its name. For example, Ball Corp accounts for about 40% of North-American beverage-can production and nearly a third of the European beverage-can supply – making it the world’s largest metal can manufacturer. Ball Corp has an economic moat in that there are relatively few competitors in the long-term contract driven industry with efficient scale. Much like railroads and utilities, it would be difficult – although certainly not impossible – for a start-up to quickly displace market share.
Some of the risks for the company include a switch to more glass and plastic containers (ironic considering the company began as a glass container maker), a concentrated customer base and the potential for future regulation.
15 Years of Growth
Ball Corp has grown earnings (orange line) at a compound rate of 17.1% since 1999, resulting in a $6.6 billion dollar market cap. In addition, Ball Corp’s earnings have risen from $0.42 per share in 1999, to today’s forecasted earnings per share of approximately $3.15 for 2013. Further, Ball has had a steady dividend (pink line) which has been increasing as of late.
For a look at how the market has historically valued Ball Corp, see the relationship between the price (black line) and earnings of the company as seen on the Earnings and Price Correlated F.A.S.T. Graph below.
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Here we see that Ball’s market price previously began to deviate from its justified earnings growth; starting to become undervalued during the recent recession and coming back slightly in the last couple of years. Today, Ball Corp appears fairly valued in relation to both its historical earnings and relative valuation.
In tandem with the strong earnings growth, Ball Corp shareholders have enjoyed a compound annual return of 15.6% which correlates closely with the 17.1% growth rate in earnings per share. A hypothetical $10,000 investment in Ball Corp on 12/31/1998 would have grown to a total value of $84,580.70, without reinvesting dividends. Said differently, Ball Corp shareholders have enjoyed total returns that were roughly 5.2 times the value that would have been achieved by investing in the S&P 500 over the same time period. It’s also interesting to note that an investor would have received approximately 2.2 times the amount of dividend income as the index as well.
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But of course – as the saying goes – past performance does not guarantee future results. Thus while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.
In the opening paragraphs potential catalysts, opportunities and risks were described. It follows that the probabilities of these outcomes should be the guide for one’s investment focus. Yet it is still useful to determine whether or not your predictions seem reasonable.
Fifteen leading analysts reporting to Standard & Poor’s Capital IQ come to a consensus 5-year annual estimated return grow rate for Ball Corp of 8.5%. In addition, Ball Corp is currently trading at a P/E of 14.5, which is inside the “value corridor” (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Ball Corp’s valuation would be $72.76 at the end of 2018, which would be a 10.4% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.
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Now, it’s paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs’ subscriber is also able to change these estimates to fit their own thesis or scenario analysis.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk treasury bonds. Comparing an investment in Ball Corp to an equal investment in a 10 year treasury bond, illustrates that Ball Corp’s expected earnings would be 4 times that of the 10 year T-Bond Interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.
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Finally, it’s important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that – in the long-run – the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: “in what should I invest?” and “at what time?” In viewing the past history and future prospects of Ball Corp we have learned that it appears to be a strong company with reasonable upcoming opportunities. However, as always, we recommend that the reader conduct his or her own thorough due diligence.
Disclosure: No positions at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
About the author:F.A.S.T. Graphs™ is a powerful research tool providing "essential fundamentals at a glance" on over 17,000 symbols. F.A.S.T. Graphs™ empowers the user to research stocks deeper and faster by allowing them to exploit the undeniable relationship and functional correlation between long-term earnings growth and market price. Warren Buffett, the greatest capital allocator of all time, said; "there are only two things that investor needs to know; how to value a company and how to think about stock prices." With the F.A.S.T. Graphs™ at their disposal, users are able to perform both of these critical tasks... FAST.
F.A.S.T. is an acronym for Fundamentals Analyzer Software Tool that takes all the hours of manual graphing of business fundamentals and reduces it to seconds, giving you critical information in an instant. With one glance you know a lot about the business you are graphing and its past, present and future value. F.A.S.T. Graphs™ should be the first step in every research project. Each graph is worth 1,000 words in describing a company's growth, consistency and valuation.