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Jonathan Poland
Jonathan Poland
Articles (453)  | Author's Website |

Crown Holdings Is Another Boring Bargain Stock

Recent acquisitions have not been realized in the market value of this stock

October 11, 2018 | About:

Over the last week, I've written about multiple boring companies that are too cheap to pass up. Crown Holdings (NYSE:CCK) is another one.

Crown is one of the largest producers of metal packaging in the world. The company makes beverage cans, metal food cans, closures and aerosol cans. With the purchase of Signode Industrial Group last year, Crown has widened its presence to a variety of protective transit packaging as well. Thanks to that acquisition, the company is expecting earnings to be over $5 a share for 2018 and upwards of $6 per share in 2019. If that plays out how management wants, the stock could price between $100 and $120 based on the company's current earnings multiple.

Currency issues

While the company's headquarters is in the U.S., the majority of its revenue comes from Europe, South America and Southeast Asia. This is of note because the strength of the U.S. dollar is likely to negatively impact the financial results it reports. 

But that strength could shift back at any moment, and the margin of safety investors pay for now could be a boon for its stock price if foreign currencies rise against the dollar, something I believe will happen during or after the next presidential election cycle.

The stock is down 17% year to date and is relatively flat over the last five years. If the U.S. stock market moves into correction territory, Crown is likely to follow suit, and nevermind the 830 point sell-off yesterday, the Dow has another (Jay-Z would appreciate this number) 4,440 points to go.

Yet it's the value of Crown's business that matters most. The company has built a strong geographic profile in the beverage-can industry and will benefit from a growing footprint in emerging markets. Furthermore, the business model has relatively high margins, which should help the company pay down the debt incurred from the Signode buyout while it continues to pursues expansion into emerging markets.

Emerging market potential

Crown continues to make a large bet on continued beverage-can volume growth in the emerging markets of Southeast Asia, which could backfire. But the use of aluminum for cans is always preferable to glass or plastic since if not recycled, the metal takes far less time to decompose than either of the alternatives. An aluminum can may take 200 years to decompose, but plastic bottles take 450 years, and glass takes a million years. Another reason the aluminum industry isn't going anywhere, either.

The other challenge would-be upstarts have is that once the lid and can are formed, they need to be shipped to the filling location, which must be within 200 miles to be economical. And, since these facilities can be moved rather easily, one that may be underperforming in a high cost jurisdiction (say, inside the U.S.) can be moved to a lower-cost one where profits and potential are greater without much of a hit to financial performance.

The bottom line

Crown is a company generating close to $700 million in annual profit on $12 billion in sales, with a stock priced at just 8x earnings. At 20x, the market cap is $14 billion, and that seems like a more reasonable number considering the world's largest producer of aluminum beverage cans is valued at $15.1 billion, yet is likely to generate less income and revenue than Crown in 2019.

Disclosure: I am not long/short any stock mentioned in this article.

About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

Visit Jonathan Poland's Website

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