Ball Corp BLL
October 21, 2008 - 6:15pm EST by
2008 2009
Price: 32.40 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 3,132 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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I believe that BLL offers a compelling long term investment opportunity over the next 2 years with a potential appreciation of 72%. BLL operates in the food and beverage packaging business, which has an oligopolistic structure and is highly defensive. The long thesis is predicated upon repricing of legacy contracts, operational improvements, debt paydown and stock buybacks. BLL has been recently beaten down due to general market weakness, EPS adjustments for currency translation and short term concerns on the upcoming quarter. Last year 3Q benefited from an unusually low tax rate of 5.7% and a one-time fire insurance benefit resulting in difficult modeling. Management doesn’t provide an explicit guidance, which is adding to the fears. BLL is cheap, trading at 7.8x 2-year forward EPS, which is 37% below its 10 year average of 12.4x. I am estimating that BLL will earn $4.57 in 2010, assuming a 12.4x multiple the stock will appreciate 72% over the course of 2 years.


Company Details

Ball Corporation makes metal and plastic packaging for beverages, food and household products. BLL also designs and develops aerospace systems. The company operates in 5 segments: Metal Beverage Packaging Americas/Asia, Metal Beverage Packaging Europe, Metal Food & Household Products Packaging Americas, Plastic Packaging Americas, and Aerospace & Technologies. The majority of sales are derived from sales of beverage cans. In 2007 net sales exceeded $7.4bn. The company is headquartered in Bloomfield, Colorado and employs approximately 15,500 people. The stock trades on the NYSE under the ticker BLL.


Segment Breakdown

Metal Beverage Packaging Americas/Asia:

Metal beverage containers are typically sold under multi-year supply contracts to fillers of soft drinks, beer, energy drinks and other beverages. In 2007 the segment accounted for 37% of sales and had a 7.7% operating margin.



Metal Beverage Packaging, Europe:

In 2007 BLL’s European plants manufactured more than 14bn cans, approximately 60% form aluminum and 40% from steel. The segment provided 26% of sales and had a 14% operating margin.



Metal Food & Household Packaging, Americas:

Produces two-piece and three-piece food containers and ends for packaging food. The containers and ends are sold to food producers in North America. The segment also manufactures aerosol cans, paint cans and custom/specialty containers. In 2007 the segment accounted for 16% of sales and had a 3.1% operating margin.


Plastic Packaging, Americas:

The segment manufactures plastic bottles, beer containers and food & specialty containers. Most products are sold under long term contracts to suppliers of bottled water and carbonated soft drinks. The segment provided 10.2% of sales and had a 3.5% operating margin.



Aerospace & Technologies:

This segment sells national defense solutions, spacecraft and advanced technologies. The segment typically sells under contracts ranging from 1 to 5 years. Aerospace & Technologies accounted for 11% of sales and had an operating margin of 8.2%




There are several developments taking place between now and 2010 that will have a significant positive impact on profitability in 2009 and 2010. These developments are as follows:


1. Repricing of North American Coke and Pepsi contracts in 2009 and 2010.

Typically BLL enters 3-5 year contracts to sell beverage cans. The contracts have a built in inflation mechanism that adjusts for inflation based on PPI. In the last couple of years there has been significant inflation in raw material costs far outpacing the PPI. The rapid increase in raw material costs and the company’s inability to pass on the increases is putting significant pressure on margins. In 2009 and 2010 the Coke and Pepsi contracts are coming up for renewal, Coke in 2009 and Pepsi in 2010. The renewals are an opportunity for the company to raise prices and to pass on increased costs associated with manufacturing cans. According to my estimates the Coke and Pepsi parts of the business are currently operating at EBIT margins that are significantly below corporate average, ranging from 4.5-5%. Overall the Americas/Asia Beverage Can segment operates at 9.2% margin. The contract repricing should bring the Coke and Pepsi margins significantly closer to the overall segment margin. Falling aluminum prices make it easier to implement price increases because the magnitude of the price increase doesn’t have to be as high as it would have been under higher aluminum prices. Assuming that the Coke margin improves 350 basis points to 8% in 2009, Pepsi margins remain depressed at 4.5% and no revenue growth in North America brings the overall segment margin to 9.5%. Assuming conservatively no revenue growth (except 8% in Asia) and no margin improvement in other segments yields approximately $9.4mn of incremental EBIT in 2009 compared to 2008, this equates to $0.07 of EPS. American and European Packaging segments assume declining volumes and increasing prices, which leaves revenue flat.

Performing similar calculations for the 2010 Pepsi contract repricing where the EBIT margin improves by 300 basis points, adds approximately an additional $22mn to EBIT and $0.16 to EPS. The calculation assumes again no revenue growth and no margin improvement in other segments. The repricing of Coke and Pepsi adds $9.4mn to EBIT in 2009 and $31.4mn in 2010. The EPS impact over two years from the repricing of both contracts is about $0.30. The Bev Can Americas/Asia segment margin increases to 10.2% in 2010. This is still below the 11.3% margin level in the 2003-2004 timeframe, right around the time when the Coke and Pepsi contracts were originally signed.


Bev Can Americas/Asia Segment Breakdown for 2008 (this is not explicitly provided by the company):

  • Asia revenues of $270mn. We know that Asia had $250mn worth of sales in 2007. Applying a conservative 8% annual growth rate yields $270mn in 2008 revenues. EBIT margins in Asia are assumed to be the same as in 2007 at 10.9%.
  • North America breaks down into beer, specialty* beer, specialty non-alcoholic and soda cans
    • Beer 37% of sales, 10% EBIT
    • Specialty beer 8% of sales, 13% EBIT
    • Specialty non-alcoholic 8%, 17.5% EBIT
    • Coke 11% of sales, 5% EBIT
    • Pepsi 23% of sales, 4.5% EBIT
  • *Specialty are cans that aren’t 12oz


2. Restructuring benefit in the Food & Household business to bear fruit in 2009.

In 2007 BLL announced that they are closing 10 manufacturing lines and shedding non-profitable customers. The changes have already been implemented result in a $15mn in cost savings in 2009. This is a straight forward addition to 2009 EBIT, which translates to about $0.10 of EPS in 2009.


3. Margins doubling in the Plastics Packaging business.

This is a similar situation to Coke and Pepsi contract repricing described above. BLL is locked into a 5 year contract with a large customer in the Plastics segment. Because there was no raw material inflation when the contract was signed raw material cost adjustments were not included. As raw material costs increased BLL was unable to pass the cost on to this large customer. This put significant pressure on margins. Repricing of this contract will substantially increase prices to account for the recent increases in raw material costs. The repricing of this large contract, repricing of other contracts and capacity reductions should dramatically improve margins. The Plastics segment margins are expected to double in 2009. The change in the margin will add $0.19 to EPS in 2009.


4. Share buyback

BLL has consistently bought back stock.

In the second half of 2008 the company plans to spend $119mn to buy back stock. Assuming BLL spent $59.5mn in 3Q08 and buys stock at $42 and spends $59.5mn in 4Q08 and buys at $36 the company will end the year with 95.4mn shares. The 2008 benefit is small, around $0.02 per share. Looking further out into 2009, BLL has a stock buyback cap of $175mn. Considering that the company wanted to change its debt covenants to increase the size of the stock buyback it’s safe to assume that the company will buy back the stock that it can in 2009. Assuming the company buys back their stock at $40 (23% above current price) results in 93.2mn diluted shares outstanding in 2009. The buyback will add approximately $0.10 to EPS in 2009. I am not assuming a stock buyback in 2010 though it’s likely that the company will continue to buy back stock.


5. BLL is likely to call some of its debt resulting in a lower interest payment.

Management expects the company to generate $400mn of cash in 2009. Assuming that $37.3mn is used for the dividend and $175mn is used for a stock buyback leaves $187.7mn to pay down debt. BLL will likely recall the 2012 Senior Notes, which carry a 6.875% interest. If $187.7mn of the debt is called in interest savings result in approximately $0.10 of additional EPS.


To summarize, assuming no revenue growth in any segment except for China the above five developments suggest an EPS figure of $4.57 in 2010.



Reviewing the last 10 years, on a 2 year forward basis BLL is trading at a significantly depressed level. The average 2 year forward P/E over the last 10 years is 12.4x. The stock is currently trading at 7.8x. Considering that the beverage and food packaging business is typically viewed as defensive, the positive fundamental developments described above and the current valuation the stock is very cheap.



The main risk in the BLL story is global demand. Though I assumed no growth (except Asia), it’s possible that sales growth becomes slightly negative and have a small negative impact on EPS. There is additional near term currency risk and quarter earnings risk. The stronger dollar is a headwind to the European segment. The translation of topline European revenues at a stronger dollar will adversely impact European growth. The company is adding capacity in Europe, which should offset currency headwinds. The upcoming quarter is also a near-term risk. The company doesn’t guide, which results in more guesswork from analysts and hence more volatility on quarterly prints. BLL is expected to earn $1.05-1.10 when it reports 3Q08. I don’t believe there is much risk in the key parts of the long term thesis. The repricing of the contracts and the share/debt buybacks are nearly certain and the extremely low valuation provides support.


Revenues 2008 2009 2010
Metal Beverage Packaging, Americas & Asia 3,058.2 3,079.8 3,103.1
Metal Beverage Packaging, Europe 1,899.3 1,899.3 1,899.3
Metal Food & Household Packaging, Americas 1,171.8 1,171.8 1,171.8
Plastic Packaging, Americas 754.1 754.1 754.1
Aerospace & Technologies 746.8 746.8 746.8
Operating Income
Metal Beverage Packaging, Americas & Asia 283.0 293.3 317.9
Metal Beverage Packaging, Europe 242.2 242.2 242.2
Metal Food & Household Packaging, Americas 61.9 76.9 76.9
Plastic Packaging, Americas 25.9 51.8 51.8
Aerospace & Technologies 70.0 61.1 61.1
Corporate -42.1 -42.1 -42.1
Operating Profit Margin
Metal Beverage Packaging, Americas & Asia 9.3% 9.5% 10.2%
Metal Beverage Packaging, Europe 12.8% 12.8% 12.8%
Metal Food & Household Packaging, Americas 5.3% 6.6% 6.6%
Plastic Packaging, Americas 3.4% 6.9% 6.9%
Aerospace & Technologies 9.4% 8.2% 8.2%
Net Sales 7,630.3 7,651.9 7,675.2
Operating Profit / EBIT 640.8 683.1 707.7
Operating Margin 8.4% 8.9% 9.2%
Interest Expense 139.8 135.6 122.7
Pre-tax Income 501.0 547.6 585.0
Taxes 160.3 175.2 187.2
After-tax Income 340.7 372.3 397.8
Equity Co. Earnings (Losses) 18.0 18.0 18.5
Minority Interests 0.5 0.5 0.6
Net Income 358.2 389.8 415.8
Shares 97.4 93.2 91.0
EPS 3.68 4.18 4.57
P/E @ $33/sh 9.0x 7.9x 7.2x
EBITDA 939.3 981.6 1,006.2
EV/EBITDA 6.2x 6.0x 5.6x


See above.
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