January 04, 2023 - 5:16pm EST by
2023 2024
Price: 52.49 EPS 3.50 3.7
Shares Out. (in M): 313 P/E 15.0 14.2
Market Cap (in $M): 16,478 P/FCF 22 20
Net Debt (in $M): 8,289 EBIT 1,696 1,878
TEV (in $M): 24,767 TEV/EBIT 14.6 13.2

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Ball Corp is a global leader in beverage cans with 30% market share globally and 40% in the US. Ball also has an aerospace division that specializes in instrumentation and components which makes up about 10% of earnings. Ball’s primary customers are large beverage companies like Coca-Cola and AB-InBev. 

The reason why this opportunity exists is because the beverage can industry over-built supply in 2021 and 2022 into an beverage can market that declined sharply due to a post COVID pull-back and moderating demand from a slowing economy. Furthermore, rising aluminum prices lead to a price/cost squeeze with all these factors taking operating margins from 13% in 2020 to 10% in 2022. This so-called perfect storm is unwinding in 2023 which sets up well for BALL.

Thesis Point #1 - Capacity is rationalizing in 2023

The global beverage can market is fairly consolidated with the top 4 producers holding 90% market share in the US and 65% globally with Ball being the largest products. Ball’s largest competitor is Crown Holdings which holds 20% market share both globally and in the US. 

Leading up to 2020, the NAM beverage can industry was oversold and operating at utilization rates over 100% since 2019 exiting 2020 with 110 bn cans of capacity. Exacerbating already tight supply was a COVID driven demand surge in 2020 and 2021 where demand went from 105 bn cans to 120bn cans in 2021. In response to the surge in demand, the top players announced and added capacity of 25bn cans in 2022 through 2023, which led to bev can utilization falling to the mid-90s by 2H22. 

Since mid-2022, 7bn cans of capacity have been mothballed and plans for 5bn cans have been postponed indefinitely, which brings utilization in 2H23 back into the mid-90’s barring a severe economic recession. 

Below illustrates the capacity recovery net additions and closures.

Thesis Point #2 - Demand is Stabilizing and Inventory De-stocking is Nearing an End

Beverage can end demand disappointed in 2022 as beverage producers prioritized price over volume, coupled with destocking, leading to NAM shipments declining 2% vs expectations for HSD growth in nearly 2022. Exiting 2022, beverage can demand grew 1-2% in Nov and Dec after declining LSD through the summer and fall according to Nielsen data. 

Based on anecdotes from CCK and BALL at recent conferences in November, destocking is in late innings and demand has stabilized off low levels and showing some greenshoots entering the holiday period and into 2023. 

Based on the above, I think a reasonable outcome is 1-2% growth in 2023 vs a historical 3-4% growth rate. Separately, BALL is confident that they can grow EPS 10-15% in 2023 with flat volumes given cost structure rationalization and cost inflation clawback from declining aluminum prices.

Thesis Point #3 - Price/Cost Squeeze Turns into a Tailwind in 2023

Due to the timing of contracts with the major beverage can producers, there is a lag for the contract renegotiations and PPI escalators to hit Ball financials, which translates $100m of net pricing to Ball in 2023. 

Furthermore, aluminum is down 35% from the 2022 peak which benefits Ball Corp in the form of inflation relief and also making the beverage cans more cost competitive than other substrates, especially plastic, which means BALL will likely see pricing reset higher at flat to LSD volumes or have volume pick back up to the MSD growth with some price give back. Either way, Ball is expected to gain back margin in 2023 back to the historical 13% level.

Financials and Valuation

I think Ball is positioned to grow EPS 15% in 2023 with net +ve price from PPI escalators contributing $100m in EBIT, $100m from cost savings and $50m on recovering raw material inflation driving $3.50 EPS for 2023 (7% above current consensus).

Ball has historically traded at a 20x multiple prior to the capacity and earnings challenges in 2022. I expect Ball to trade back to their historical multiple of 20x, and at $3.50 EPS, it implies a price target of $70/sh (33% upside).

The following chart illustrates Ball’s historical P/E ratio. 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


I think Ball is likely to guide conservative during their 4Q22 earnings call to set the bar low but will continue to beat and raise through 2023 as they gain confidence through the year. The ideal catalyst timing is after they set the bar lower enough.

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