Description

Summary:

The key to the CCK story is a defensive business and a repricing of the Food business in Europe and North America. The company expects to implement price increases in excess of 30%, driving a substantial increase in EBIT. The company will also see a benefit on the interest expense line from the 2008 debt paydown. Additionally we feel it’s time to buy stocks with international exposure. In the past few weeks currency has gone from a headwind to a tailwind vs updated 2009 models. (models use $1.30/EUR). The main headwinds facing the company are pension expense and tinplate price increases, which we have accounted for in our estimates. Overall we expect CCK to generate $1.96 EPS in 2009 vs $1.92 consensus.

Company Description:

Crown Holdings, Inc is global manufacturing company primarily in the business of manufacturing aluminum and steel cans and closures for food and beverage. Crown also manufactures aerosol cans and other specialty packaging. The company operates in North and South America, Europe, Middle East and Asia. The majority of sales come from North America and Europe from the sale of beverage and food cans.

Segments:

Americas Beverage

The Americas Beverage segment produces aluminum and steel beverage cans and ends. The segment supplies these packaging products to beverage and beer companies, including Coca-Cola, Kroger, National Beverage and Pepsi-Cola.

North America Food

The North America Food segment manufactures steel and aluminum food cans and ends, and metal vacuum closures. The Company sells food cans to marketers such as ConAgra & H.J. Heinz through the segment. North America Food offers a wide variety of metal closures and sealing equipment solutions to leading marketers such as Abbott Laboratories, H. J. Heinz & Kraft.

European Beverage

The European Beverage segment produces steel and aluminum beverage cans and ends, and steel crowns. It supplies beverage cans and ends, and other packaging products to beverage and beer companies, including Anheuser-Busch, Cadbury Schweppes, Coca-Cola, Cott Beverages, Heineken, InBev, Kroger, Pepsi-Cola, and Scottish & Newcastle.

European Food

The segment manufactures steel and aluminum food cans and ends, and metal vacuum closures. CCK sells food cans to marketers such as Bonduelle, Continentale, Menu Foods, Nestle, Premier Foods and Stockmeyer through this segment. European Food also offers a wide variety of metal closures and sealing equipment solutions to leading marketers such as Anheuser-Busch & Nestle.

European Specialty Packaging

The segment is engaged in the production of a variety of specialty containers with numerous lid and closure variations. For the consumer market, it manufactures a range of steel containers for cookies and cakes, tea and coffee, confectionery, giftware, personal care, tobacco, wine and spirits, as well as non-processed food products. The segment produces steel containers for paints, inks, chemical, automotive and household products for the industrial market. The Company’s specialty packaging customers include Abbott Laboratories, Akzo Nobel, Cadbury Schweppes, Nestle, Sigma, Teisseire, Tikkurila Oy, Wrigley and United Biscuits.

Non-Reportable Segments

The non-reportable segment primarily comprises the global Aerosol segment and the Asia-Pacific division. The Company’s customers for aerosol cans and ends include manufacturers of personal care, food, household and industrial products, including Procter & Gamble (Gillette), S.C. Johnson and Unilever. The Asia-Pacific division produces aluminum beverage cans and ends, steel food and aerosol cans and ends, and metal caps. The division’s customers include Mars, Unilever, Nestle, Coca-Cola and Pepsi-Cola.

Thesis/catalysts:

North American Food:

     The most important change for 2009 is a double digit increase in prices. We are assuming that prices will be up 13% for 2009. The reasons why the company is able to raise prices are an increase in demand for canned foods, as consumers tighten their belts and eat more at home; and an unprecedented increase in the company’s main raw material—tinplate steel, which has to be recovered through pricing. Tinplate steel prices are expected to increase 20% in 2009. Though steel prices have come down in the last few months, tinplate is a very specialized product and prices are expected to be up dramatically. Assuming conservatively flat food can volumes and a non-tinplate cost increase of 5%, we expect EBIT to increase by $10.4mn in 2009. Due to the fact that SLGN, the largest player in the industry, has a fixed passthrough mechanism we have limited upside built into the model.

European Beverage:

To get an accurate view of the European Beverage segment it must be broken down into the Middle Eastern and non-Middle Eastern parts. This is one of the aspects the market is missing on this stock. The market is penalizing the stock because it’s expecting the entire European segment to get hit with adverse currency translation, however, only 63% of the European Beverage sales are affected by currency. The other 37% is fixed to the US dollar.

The Non-Middle Eastern Beverage business will be impacted by three developments: rising tinplate costs, falling aluminum costs and adverse currency translation. As already discussed above tinplate costs are expected to increase 20-30% in 2009. On the other hand aluminum costs are down 25% when compared to the Nov-Dec 2007 timeframe. This is when annual aluminum contracts were negotiated. We are assuming flat volumes and other costs to increase 5%. Crown structured their business to have revenues and costs in the same currency, however, there is still the impact of translating from local currency to USD. The translation impact on European Beverage EBIT is negative 9%. The net impact on 2009 is a $22mn decrease in EBIT, where the increases in tinplate, other costs and FX impact is partially offset by decreases in aluminum and price increases. We are being very conservative on prices, assuming a decline of 4%.

The Middle East is similar to Europe, however, there is no adverse impact from currency translation. The ME is pegged to the US dollar. We are conservatively expecting sales to increase 2.5%, tinplate costs up 20% and aluminum costs down 25%, other costs up 5%. This implies an EBIT increase of $10mn in 2009. Overall we expect European Beverage EBIT to be down 12mn in 2009.

Europe Food:

     Similar changes to other segments are taking place in the European Food segment. The company is expecting to absorb a 30% price increase in tinplate steel. Even more so than North American Food, in European Food the company has pricing power and asked for a 32% price increase. We believe CCK can get at least a 20% price increase. Volumes in this business are also relatively strong. During recessions consumers tend to stay home more and eat more canned foods. We are assuming volumes will be up 3%. We are assuming the company will experience a 9% headwind from FX translation, but at current FX rates there is room for upside. Bottom line, we are expecting EBIT to be up in 2009 compared to 2008, where the benefits from higher price are offset by higher tinplate costs and adverse FX.

Europe and North America Aerosol:

     The Aerosol story isn’t much different from other segments. The key variables are tinplate, price and FX. In Europe the company expects to push through a 12% price increase, but at the same time get hit with a 20% increase in tinplate costs. Currency is a 9% headwind. The net result is a decline in EBIT of about $3mn in 2009. In North America we are expecting similar price and cost increases, but without the currency headwind. This results in a flat North American EBIT in 2009 for the Aerosol business.

Debt:

     There are two positive developments for CCK on the debt side. The first is the decrease in interest expense on the Euro-denominated debt from translation to USD. CCK has just under EUR750mn in European debt paying interest between 6% and 7%. Assuming the current exchange rate for 4Q the 2008 interest expense will be $72mn. Assuming the current exchange rate for 2009 results in a $64mn interest expense from the Euro-denominated debt, a benefit of $8mn compared to 2008. (There is also a potential $2mn benefit from a lower EURIBOR rate, but we are not including this benefit in our calculations.) The second part of the debt benefit will come from a debt buyback. The company is expected to generate $370 of cash in 2009. Assuming $250mn is used to pay down debt results in interest savings of 19mn. The two debt benefits add $0.12 to 2009 EPS.

Pension:

     A big headwind for CCK is future pension expense. The main variable in the pension expense is the present value of plan assets, which gets multiplied by an assumed expected return figure. The result is used as an offset to other pension expense items that are typically steady. The significant decline in equity markets around the world is going to decrease the level of plan assets and increase the pension expense. We are estimating that pension and other post retirement expenses will increase by 24mn in 2009.

Valuation:

CCK should trade on a free cashflow multiple as it runs maintenance capex through the P&L resulting in a much larger FCF yield than EPS. In 2009 the company expects growth capex of 135mn and D&A of 225mn resulting in approximately 90mn more cash flow than net income. We expect CCK to generate 400mn in free cashflow in 2009 resulting in a 12.5% cashflow yield. For a defensive, deleverage story that is too cheap in our view.

Risks:

Catalyst