Packaging Companies Pack a Punch - Barron's

Includes: BLL, BMS, CCK, OI, SEE, SLGN
by: Rachael Granby

Packaging companies tend to hold up well even during recessions, and so do their shares. Though packaging stocks have been hammered by market madness, they could make a strong rebound next year if companies post the double-digit earnings gains some analysts expect. Barron's Christopher C. Williams sees Crown Holdings (NYSE:CCK), Silgan Holdings (NASDAQ:SLGN), Owens-Illinois (NYSE:OI) and Ball (NYSE:BLL) among the most defensive plays in today's market.

Though not immune to economic downturns, there's plenty to like about the packaging industry: It boasts stable revenue growth and attractive industry valuations, generates plenty of cash and has benefited from the steep drop in oil prices. Despite recent economic turmoil, many packaging companies reported solid Q3 results and could see double-digit earnings growth in 2009. Packagers could gain even during the recession, as tough economic times encourage more at-home dining and packagers supply containers for food giants.

Crown, Silgan, Owens-Illinois and Ball are the leaders in rigid packing and are well-positioned for growth.

Crown had a strong Q3, beating estimates, in part due to international sales. Around 55% of Crown's revenue is generated in Europe, where it controls 46% of the food-can market. The company expects to generate $800M of operating profits this year, and nearly $400M of free cash flow. Analyst Alton Stump forecasts earnings of $1.74/share this year on $8.5B in revenue and $2.03 in 2009. Trading around $16, Stump see shares at $38 in a year. Some investors are concerned about Crown's heavy debt load and the effect of a stronger dollar on euro-based earnings, but those worries are arguably reflected in the stock price already, which is down 38% in the past year, and the company is working to pay down its debt.

Silgan is the top player in the $3.5B North American metal-food-can market, but recently lowered its yearly profit guidance on higher borrowing costs. Despite this, Deutsche Bank analyst Mark Wilde upgraded the stock to Buy from Hold after an 11% jump in quarterly profits. Currently trading at $44.30, Wilde has a target of $50/share, or 12 times 2008 consensus estimates of $3.57 a share. Other analysts see Silgan as high as $65-$67.

Like other industry players, Owens-Illinois is also down this year, by a hefty 60%, despite a better-than-expected third quarter. Investors are worried about the company's $3.5B in debt and its international exposure. Still, many value investors have been drawn by the stock's single-digit P/E ratio, pointing out that management is doing a good job and the company is working to reduce its debt.

Ball is the largest packaging company by market capitalization, and posted a 67% increase in Q3 profits thanks to strong overseas demand. Analysts expect earnings of $3.64/share this year on almost $7.6B of sales and $4.01 next year. Down 25% this year to $34.94, the stock could trade closer to $50 in a year if earnings grow as expected.

  • Other stocks mentioned in the article: Bemis (NYSE:BMS), Sealed Air (NYSE:SEE)
  • "It's amazing how investors will hide in consumer products but forget that the suppliers to that sector are just as defensive," says Wachovia analyst Ghansham Panjabi. "We remain bullish on the packagers and expect absolute -- not just relative -- performance in 2009."


  • KeyBanc recently reiterated its Buy rating for Ball, Crown and Owens-Illinois, and downgraded Silgan to Hold from Buy. "As has occurred during and following past recessions, packaging stocks are out-performing the broader market by a wide margin, a trend we expect to continue in 2009."