Ball Corp. Is Well-Equipped To Weather COVID-19 Outbreak
- Ball Corp. enjoys a competitive moat in the beverage packaging industry.
- The company returns significant value to shareholders.
- It faces risks related to a concentrated customer base, high debt, and stiff competition in the packaging space.
Ball Corp. (BLL) is one of the stocks which has been long ignored by the market despite its excellent fundamentals. The ongoing coronavirus pandemic has finally brought this leading supplier of aluminum packaging products to the forefront. Although the company’s clients involve manufacturers of beverage, personal care, and household products, the key focus is on the beverages segment. The company's largest product line is aluminum beverage containers, but it also produces extruded aluminum aerosol containers and aluminum slugs.
While the beverages segment is not completely immune to the pandemic, it is definitely one amongst the least affected. In recessionary environments, people would most likely forego costlier purchases first. Hence, although Ball Corp.’s packaging business is not very exciting, it is definitely one of the few coronavirus resilient ones in the market. I believe Ball Corp. can prove to be a stable and attractive investment for retail investors, especially during the coronavirus pandemic.
Ball Corp. revenues have a safety net during the COVID-19 pandemic
Ball Corp. is mainly in the business of supplying aluminum cans to beverage companies. The end-demand for beverages is generally less cyclical as compared to many other products. According to a new study by Fact.MR, the non-alcoholic beer market will grow at a CAGR of 7% from 2019 to 2027. Recent Nielsen data also highlights a solid boost in demand for alcoholic drinks.
Both these trends will help Coca-Cola (KO) and Anheuser-Busch InBev (BUD), two of Ball Corp.’s biggest customers. Anheuser-Busch InBev is the largest brewer in the world. I do not expect these beverage companies to remain completely unaffected in these uncertain times. Notably, Coca-Cola has highlighted the negative revenue impact of COVID-19 on sales, especially due to ongoing lockdowns in international markets in the first quarter of 2020. However, the impact has been partly offset due to the resilience of traditional distribution channels such as mom-and-pop stores and increased demand for home delivery. Hence, unlike many other businesses, it will not be a complete free fall for beverage companies. This, in turn, protects Ball Corp.’s revenue stream to a considerable degree.
Ball Corp. is one of the big five metal beverage can manufacturers in North America, a market which accounted for almost 41% of its revenues in 2019. Out of the 115 billion units shipped in North America in 2019, Ball Corp. accounted for 48 billion units. The company is also the largest metal beverage can manufacturer in Europe, and accounted for almost 42% of the 72 billion containers shipped in 2019. Finally, it is also the largest producer in those South American companies where it operates, and accounted for almost 49% of South American shipments in 2019. The leadership position in the developed markets is definitely a competitive advantage and business moat for the company.
Ball Corp. enters into multi-year supply contracts to fillers of carbonated soft drinks, beer, energy drinks, and other beverages. The company has a broad network of manufacturing plants across the world. These characteristics can protect it from significant top line impact, at least in the short and medium term.
The demand for soft drinks has been steadily on a decline in the last few years. However, this is being substituted by plant-based drinks, functional drinks, and sparkling beverages. The shift in consumer preferences is not a matter of concern for Ball Corp.
Ironically, the company may see stable, or even improved, margins during the pandemic
In April 2020, aluminum prices have fallen significantly due to reduced industrial activity following COVID-19 restrictions. Analysts now project prices to remain low for a long period of time. This is a major positive for Ball Corp., as aluminum is its main raw material.
Ball Corp.’s aluminum cans are also more appealing to today’s customers, who are acutely aware of the plastic pollution crisis. Hence, as people increasingly opt for sustainable packaging, Ball Corp.’s sales volumes and revenue prospects will become even better. In fact, the company’s $600 million capex investment can be considered to be a very good sign, as it may be indicative of surety of future revenue streams.
The company has been reporting robust financial performance
In 2019, Ball Corp. reported revenues of $11.47 billion, a YoY decline of 1.38%. The company’s GAAP EPS of $1.66 was up YoY by 29%. Its non-GAAP EPS of $2.53 was up by 15% YoY in 2019. All these are solid numbers for an industrials company.
In 2019, Ball Corp. also managed to generate $950 million free cash flow, after spending $250 million of maintenance capex and an additional $350 million in growth capex. This is definitely indicative of a well-run organization.
Finally, it completed net share repurchases of $945 million and paid $182 million of dividends, returning an excess of $1.1 billion to shareholders in 2019. The company’s dividend yield is 0.74%. Ball Corp. is definitely returning significant value to shareholders.
Investors should consider these risks
The biggest top line impact for Ball Corp. will come from its aerospace business. With airline businesses struggling across the world, the demand for instruments and sensors, radio frequency systems and components, data exploitation solutions, and a variety of advanced technologies and products that enable weather prediction and climate change monitoring will definitely go down. The company had a contracted backlog of around $2.5 billion for its aerospace business at the end of 2019. However, in the current crisis times, the U.S. government, which is a key customer of the company’s aerospace business, may be forced to delay or reduce funds allotted to these activities. The aerospace business accounted for 13% of Ball Corp.’s revenues in 2019.
At the end of 2019, Ball Corp. had $7.8 billion of interest-bearing debt on its balance sheet. High debt can be especially challenging in recessionary times. Besides, the company sells the majority of packaging products to a limited number of customers. This, again, exposes it to significant business concentration risk.
Finally, Ball Corp. faces stiff competition from other players in packaging and aerospace industries such as Crown Holdings (CCK), Graphic Packaging Holding (GPK), Berry Global Group (BERY), Amcor plc (AMCR), and Silgan Holdings (SLGN).
What price is right here?
According to Finviz, the 12-month consensus target price for Ball Corp. is $80.27. The company is currently trading at a P/E (price-to-earnings) multiple of 39.80x and a forward P/E multiple of 20.33x. Although not cheap, these levels are definitely attractive considering the fundamentals of this company. I believe that the target price of $80.27 is a realistic estimate of the growth potential of this stock.
On May 7, Goldman Sachs analyst Brian Maguire highlighted Ball Corp. as one of the companies with the least affected earnings due to COVID-19 disruptions. On March 23, he upgraded the company’s rating from Neutral to Buy.
Ball Corp. stands to benefit significantly from the switch in plastic to recyclable aluminum cans. Sales volumes can see a significant spike in post-COVID-19 times. Hence, I believe that the stock is a very attractive coronavirus-resilient pick in May 2020, especially for average-risk investors with an investment tenure of at least a year.
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