Coke or Pepsi? Miller or Bud? Which would you buy in the store, and which would you buy in the stock market?
For those of us who don’t want to choose, or want a bit of each, take a look at the Ball Corporation (BLL, Financial). It makes money, whichever your brand you buy (in the store or in the stock market). Ball provides the cans that hold the beverages of these four companies, and for other brands that need metal containers by the millions and billions.
(Photo: Ball Corporation)
In a sense we could call it a simple business, as befits its origins 134 years ago, but it’s also a highly competitive business, so the company uses a lot of technology and other tools to increase productivity. It’s also an international business and, surprisingly, also a maker of spacecraft (yes, spacecraft and satellites).
Ball appears on the Undervalued Predictable list at GuruFocus, by virtue of being currently priced at 42% below its theoretical Discout Cash Flow value, and for having a 5-Star predictability rating.
History
1880: The Ball brothers form a company to make wood-jacketed tin cans for products like paint and kerosene, but soon expanded their offerings to glass and tin-jacketed containers (kerosene corroded tin jars, but not glass jars).
1884: They begin making glass home-canning jars, the iconic product that established their name.
1956: Formation of the Ball Brothers Research Corporation, now known as Ball Aerospace & Technologies Corp.
1969: Ball acquires the Jeffco Manufacturing Company in Denver and starts metal beverage container operations.
1969: Name changed to Ball Corporation.
1973: Lists on New York Stock Exchange under ticker symbol "BLL"
1994: Ball begins manufacturing PET plastic containers.
1996: The company leaves the glass business, selling it to Compagnie de Saint-Gobain of France (previously a partner in the glass business).
2006: Acquires U.S. Can, Inc., the biggest U.S. manufacturer of aerosol cans.
2009: Ball acquires four metal beverage can plants from AB InBev, making it the world’s largest supplier of beverage cans.
2011: Launches Drive for 10, a growth and directional strategy.
History based on the company’s website and Wikipedia.org
Takeaways: A company able to draw on a long, successful history in packaging, although it shifted its focus from glass to metal. It has shown a willingness to buy and sell to realign itself with its customers.
Ball Corporation’s Business
In the 10-K Report for 2013, management describes Ball as one of the world’s leading suppliers of metal packaging to the beverage, food, personal care and household products industries. It also notes its packaging products go to a diverse group of end-users, and are manufactured in facilities around the world.
In addition, it has an aerospace division, which provides, "...aerospace and other technologies and services to governmental and commercial customers within our aerospace and technologies segment." That division turns out spacecraft, instruments and sensors, radio frequency systems and their components, and technologies that enable deep space missions.
Still, the biggest lines remain the aluminum and steel beverage containers, and as we’ve noted, it sells to some of the biggest names in the food and beverage industries. It positions itself as a low-cost manufacturer, thanks to productivity improvements.
Revenue
Ball has four reportable segments:
- metal beverage packaging, Americas and Asia;
- metal beverage packaging, Europe;
- metal food and household products packaging; and
- aerospace and technologies.
As the adjacent chart shows, Global Metal Beverage represents the lion’s share of sales. Worldwide, Ball and its competitors manufactured 198.5 billion beverage cans in 2013; food and household products accounted for another 34.5 billion units. Ball enjoys a significant market share in all of these industries and geographic segments.
Competition
The company reports intense competition in both the packaging and aerospace industries. According to its 10-K, packaging competition is driven by price, innovation, and sustainability, while in aerospace competitive drivers are technical capability, cost, and schedule.
It adds that metal packaging faces competition from alternative products, particularly PET (polyethylene terephthalate) plastics. Even some of its aerospace products are subject to competition from alternative products and services. While technology matters a great deal in productivity, the company has no patents or groups of patents with material significance to it operations.
Major competitors include: Sonoco Products Co. (SON, Financial), Brambles Ltd (BMBLY, Financial), Amcor Ltd (AMCRY, Financial), REXAM PLC (REXMY, Financial), and AptarGroup, Inc. (ATR, Financial).
Still, Ball has an enviable position among packaging companies, at least. In the biggest beverage market, North America (without Mexico), it had 37% of the 94 billion units produced in 2013 and in Europe, the second largest market, it had 30% of the nearly 59 billion units produced that year (Investor Presentation, February 2014).
Takeaways: Metal packaging giant Ball operates worldwide, and in several segments. Ball also operates an aerospace division, but it represents only 11% of its revenues. On the packaging side, the company produces products for both the beverage and food/household products sectors. In each of the segments, it faces strong competition.
Growth
At the core of its growth plan, Ball targets Earnings Per Share growth of 10% to 15% a year. To hit that target, it expects to grow existing operations by 3% to 5% a year, use CAPEX (Capital Expenditures) and acquisitions to add 5% to 7% a year, and to buy back shares at a rate of 5% to 7% a year. This growth strategy is articulated in the Drive for 10 plan, and outlined this way in the Investor Presentation:
To finance that growth, the company reports it has amended and extended its senior credit facility and issued $1 billion worth of senior notes (due in 2023) AT 4%.
Takeaways: With access to reasonably-priced financing, Ball should be able to execute on its internal and acquisitions-oriented growth. Targeting 10% to 15% a year in the packaging industry sounds ambitious, but by breaking up that goal into organic growth, CAPEX, acquisitions, and share buybacks, it should be feasible.
Management
Chairman, President and Chief Executive Officer: John A. Hayes, became chairman in 2013, president and CEO in 2011, director since 2010, joined the company in 1999; previously a vice president at Lehman Brothers
Senior Vice President, Chief Financial Officer: Scott C. Morrison has held both positions since 2010; joined the company in 2000; previously held senior banking positions
The management team comprises nine other officers holding the ranks of vice president or senior vice president.
The Board of Directors is made up of 10 directors plus Chairman Hayes. Directors have expertise or experience in accounting, banking and investment banking, packaging, executive management, marketing, manufacturing, and management consulting. Only two directors appear to have strong international connections.
The ISS Governance QuickScore Summary gives Ball a high governance risk rating, a 10/10 where 1 is considered a very good score and 10 a very poor score. The company receives three red flags, for Board Practices, Takeover Defences, and Voting Issues.
This management profile based on information provided at the company website.
Takeaways: The company has a stable and experienced team of senior executives, and a board with a broad range of knowledge and skills. However, the board seems light on international exposure, and prospective investors should check further on the Board’s ISS Governance rating (particularly minority shareholder rights in light of the warning on Takeover Defences).
Ownership
Despite the market cap and history of Ball, only one of the gurus followed by GuruFocus owns its stock. That’s Joel Greenblatt (Trades, Portfolio), with 146,047 shares. As the following chart shows, he’s been building his position over the past couple of years:
Institutional Owners: the following chart from NASDAQ.com shows ownership by pension funds, mutual funds, and other types of funds at just under 77%:
Biggest among the 434 institutional holders is Vanguard Group, Inc. with some 10 million shares.
Short Interests: GuruFocus assesses short interests at 3.9%, which is in the middle range of its history:
Insiders: Own 3% of Ball’s shares. According to Yahoo! Finance, Director Jan Nicholson is the biggest holder, at 247,317 shares. Chairman/President/CEO John Hayes had the fourth largest holding at 150,034 shares.
Takeaways: Low guru ownership, but relatively high ownership by institutions; short holdings are modest, as are insider holdings.
BLL by the Numbers
Takeaways: The number of shares outstanding is coming down; price is near the 52-week high, Return on Equity is just under 40%, and the dividend yields 0.80%.
Financial Strength
Ball receives ratings of 7/9 for Financial Strength and 9/10 for Profit & Growth at GuruFocus:
The red on the Financial Strength dashboard and the Severe Warning Sign indicate concern about the company’s debt situation. However, as we’ve noted, the company pays 4% on its debt and earns significantly more than that, freeing up cash flow and retained earnings for growth and returns to shareholders.
Where we might want to check debt is in Interest Coverage, for which it shows a ratio of 4.33. That’s well above the 2.0 that suggests a company is in trouble, but not high enough to satisfy guru investor Ben Graham, who recommended a ratio of 5.0 or greater.
In its February 2014 Investor Presentation, the company laid out its big picture financial plan:
Takeaways: Although GuruFocus posts a Severe Warning Sign, there’s no indication Ball faces any financial issues; in addition, we note that it has an ambitious share buyback plan.
Valuations
Ball appears in the Undervalued Predictable screener results because it has a high predictability rating, and because it trades at less than the calculated Discount Cash Flow value.
Predictability refers to how steadily the company has grown EBITDA. The steadier the growth, the better the future returns; GuruFocus backtesting found companies with a 5-Star rating, like Ball, averaged a gain of 12.1% per year. In addition, the higher the predictability rating, the lower the chances of suffering a loss (3% after 10 years).
Undervalued refers to the relationship between the current price and the Discount Cash Flow valuation. As the image above shows, the theoretical value based on Discount Cash Flow is $108, while the October 8 price is $62.37. On the basis of this model, the stock is undervalued by 42%.
At the same time, GuruFocus issues three Medium Warning Signs that might give us pause: the price, P/B ratio, and the P/S ratio are all near 10-year highs. If we click on the P/E ratio label in the Ratios section we see it is at a 10-year high as well.
Takeaways: Price and price-derived metrics give us both positive and negative signals, but Ball does receive the highest rating available for predictability. That suggests this stock should be on the radar of value investors, whether they see it as currently undervalued or not.
Opportunities & Risks
The emergence of collaborative, rather than transactional, relationships with customers may be the biggest opportunity right now. Collaborative relationships allow vendors like Ball to compete on service rather than price, and on long, rather than short-term contracts.
The company developed, and is executing, an articulated plan (Drive to 10) to grow the company; it covers the 10 years between 2011 and 2020.
Given the importance of beverages to Ball, it has begun establishing itself with craft brewers, even though they currently represent a small fraction of the beer sales.
Similarly, the aerospace part of the business pales in comparison to beverage and food packaging, but still makes a significant contribution (11% of consolidated net sales in 2013); at the end of Q2, 2014 aerospace had an orders backlog of $858 million.
Many companies in packaging face environmental challenges; Ball began tackling that issue several years ago. It has since progressed to the point of making the 2013 and 2014 Dow Jones Sustainability Index (DJSI World) and Dow Jones Sustainability Index North America (DJSI NA) lists. This has allowed it turn a potential liability into a competitive advantage.
Looking at the risks side, we see BLL sells a majority of its packaging products to a concentrated group of beverage, packaged food, personal care and household product companies. Trouble at any one of those companies could produce trouble at Ball.
Obsolescence also poses a threat. Alternative products, including new packaging materials yet to be developed or even imagined, might make steel and aluminum cans into modern day buggy whips.
International sales accounted for 40% of consolidated net sales in 2013. That makes exchange rate issues a significant consideration in the company’s profitability (it does do some hedging).
Almost all of its North American and United Kingdom employees enjoy defined benefit pension benefits, including some multi-employer plans. Shortfalls in funding of the Ball and multi-employer plans could mean making unbudgeted contributions.
And, Ball faces uncertain economic and political climates, which might affect its ability to operate, or affect its customers need for packaging products. For more on opportunities and risks, see the 10-K Report for 2013 and Investor Presentation.
Outlook
We will all continue to eat and drink, and in some parts of the world, residents will eat and drink much more, and that means food and drink producers will need packaging. Ball is well positioned to continue supplying that packaging.
Overall, Ball has a solid history, and there’s no reason to believe it cannot continue to profitably grow in the future. It tells us it plans to increase Earnings Per Share by 10% to 15% per year, and we would expect it to hit that target.
Conclusions
Investors looking for steady, proven growth should take a good look at the Ball Corporation. Among the specifics, they’ll want to consider whether the share price will power up and through 10-year highs that aren’t far ahead, or whether it will top out once it hits resistance created by the previous high.
All indications are that this is a well-managed, well-positioned company, ready to keep delivering returns to shareholders. Keep in mind, though, that with a small dividend, those returns will need to come through capital appreciation.
