Container and packaging firm Owens-Illinois (NYSE:OI) has suffered due to weak demand in Europe and Asia. The company, which manufactures ready-to-drink packaging for alcohol, juice, soft drinks, and pharmaceuticals, has also been dragged down by a massive debt burden and elevated interest payments, which have hampered earnings potential.
However, shares are not expensive. The company trades at less than 8 times forward earnings, which is about half of its peer group's median valuation, and shares look inexpensive based on our discounted cash-flow process. With the company announcing its intentions to use 90% of its free cash flow to pay down its debt (instead of using it on potentially value-destroying acquisitions), we think shares have a clear catalyst to converge to our fair value.
Additionally, though its European business remains challenged, with revenue falling 18% in the region during its second quarter, the company has an enviable position thanks to its various enterprise customers. As the leader in glass containers, Owens-Illinois sells its European products to alcohol giants like Heineken, Carlsberg, and Diageo (NYSE:DEO). We think alcohol companies, which tend to be recession-resistant businesses, will not suffer as much as expected. Further, we think aggressive international expansion, particularly from Diageo, will allow the firm to grow with its partners.
Business in North America also remains decent, as we saw revenue advance 2% and operating earnings nearly double during the company's second quarter. Much like in Europe, the firm's North American business is comprised of strong partnerships with the likes of Heinz (HNZ), Anheuser-Busch Inbev (NYSE:BUD), and Pepsi (NYSE:PEP)-all of which are investing heavily in growing outside developed markets. Though the company won't gain as much market share in developing regions as it would have under its M&A program, we like the firm's newfound capital selectively and stated effort to clean up its balance sheet.
Owens-Illinois scores a 7 on the Valuentum Buying Index (our stock-selection methodology), and we think shares of Owens-Illinois look interesting at current levels. The firm has decent plant infrastructure in Latin America and Asia to capitalize on growing consumption, and we think sales declines in Europe will moderate over the next few quarters. Still, we think Owens-Illinois is for the watch list, as we'd require some improvement in its Valuentum Buying Index score before adding it to the market-beating portfolio of our Best Ideas Newsletter.