Ball Corp. (BLL) (BL8) is currently a selection of GuruFocus’ Undervalued Predictable Companies Screener. The company ranks very strongly on a profitability and growth basis, with margins and returns nearing all-time highs.
While BLL struggled in its first post-IPO decade of operation, the next 15 years were a period of massive capital appreciation for shareholders.
The business:
BLL is one of the world’s largest suppliers of metal packaging to the beverage, food, personal care and household products industries. The company’s largest product lines are aluminum and steel beverage containers. They also produce steel, food, aerosol, paint, general line and decorative specialty containers, as well as extruded aluminum aerosol and beverage containers and aluminum slugs. Products are sold mainly to large multinational beverage, food, personal care and household products companies under long-term contracts.
BLL also provides aerospace and other technologies and services to governmental and commercial customers. As a whole, the packaging businesses are responsible for ~90% of sales with the remaining ~10% from their aerospace business.
Recent major M&A transaction:
In February 2015, Ball announced a formal offer for Rexam (REX) worth $6.7b, 64% in cash. The deal represented a 40% premium to Rexam's share price with synergies expected to be $300m by year three (4.5% of the purchase price). The deal probably won't close this year and the offer expires in August 2016. Clearing competition authorities is expected to be a major obstacle and the offer is conditional on divestitures of roughly $1.6b, ~26% of BLL’s metal beverage packaging revenue in the last financial year.
BLL currently has a 33% volume share in the three biggest markets and that the combined group should have roughly a 65% volume share (before the necessary divestitures mentioned above).
Valuation:
As with many companies, much of the value creation for shareholders over the past five years has stemmed from multiple expansion, not gains in financial performance. The shares have appreciated 162% over the past five years, with EPS only growing 62% (ttm EPS is $3.30). The rest of the return resulted in a rerating of the multiple, roughly doubling trough-to-peak.
Still, management's stated long-term EPS growth is 10-15%, roughly in-line with its past ten years of performance.
Before the Rexam acquisition is completed and consolidated (which could take some time and will be subject to very strict regulatory compliance), we can use GuruFocus’ Reverse DCF tool to estimate that investors are pricing in EPS growth expectations towards to high-end of management expectations.
At the company’s ten-year historical EPS growth rate, shares appear to be roughly 24% overvalued.
Until the outcome of the company’s massive Rexam acquisition becomes clear, it appears the shares may be overpriced. Indeed, EPS growth would need to come in quite above both five and ten year averages, as well as the very high-end of managements future expectations. With a bloated valuation, there may be better investment opportunities out there.
For more potential investment ideas like this one, see GuruFocus’ Undervalued Predictable Companies Screener.
