Crown Holdings designs, manufactures, and sells packaging products for consumer goods.  Its primary products are steel and aluminum cans for food, beverage, household and other consumer products and metal vacuum closures and caps.  CCK manufactures these products in the U.S. and abroad and sells through its own sales force to the soft drink, food, brewing, household products and various other industries.  CCK shouldn’t be a stranger to VIC members, having been written up four times since 2004.  The price has been higher each time. 

Crown participates in oligopolistic markets, with 75% of sales from overseas and the most attractive production footprint in the packaging space.  The company is realizing margin expansion in Europe driven by restructuring activity.  It has high exposure to emerging markets, including Asia.  Crown serves defensive end markets (primarily food cans and beverage cans) and generates a large amount of free cash.    

Our thesis is simple, so I won’t waste readers’ time by rehashing the basics, which have been described in previous VIC write-ups.  After 3-4 years of elevated capital spending to fund expansion in emerging markets, the priority of Crown’s management team today is crystal clear: returning cash to shareholders through buybacks.  Fundamentals are stable, with 3% volume growth comprised of 10% or above in Asia (China, other) and Brazil and flat volumes in North America offsetting flat volumes in Food.  Recent results have been hampered by unusually bad weather, especially in the European Food business.  The core beverage can business, though, has continued to show strength and remains the long-term growth vehicle for CCK. 

We believe that investors will award CCK a higher multiple as its ROC (higher in emerging markets than developed) and FCF potential become more apparent in 2013.  Why shouldn’t the historic 14x multiple be applied to the current earnings of this company?  That would create a $45-50 stock price.  Capital spending should decline to $225 million setting up over $500 million in free cash this year (before an $80 million minority dividend) and $600 million the next.  The current 9-10% FCF yield is compelling in today’s low-return world, especially since management is committed to giving it back to shareholders in the context of a competitively stable industry dynamic. 

Risks:

1. Price erosion in emerging markets due to alternative packaging options
2. Lack of exposure to cyclical growth
3. Strengthening dollar