Summary
- The EPS normalized estimate for the fourth quarter comes in at $0.57 per share.
- Ball has now rattled off three quarterly earnings misses in a row. Q4 needs to be solid to bring some stabilization to the share price.
- Technicals are at a crossroads. Q4 earnings now pivotal to near-term share price direction.
Intro
Ball Corporation ( BALL ) (Aluminium Packaging) is expected to announce its fourth-quarter earnings numbers this week. The quarterly EPS normalized estimate comes in at $0.57 per share, where we believe the company has to at least hit this number to keep the momentum going. Why? Well, if we look at the technical chart, we can see that shares rallied above their multi-month downcycle trend line earlier this year. This led to a pattern of higher highs last week, but shares are at risk of turning over once more and negating the bullish technicals we have seen in recent weeks.
This is why bullish investors need to be careful as we approach the company's fourth-quarter number. Shares still have not been able to punch above their pivotal 200-day moving average, so we remain in a bear market, all things remaining equal. Although the above-mentioned Q4 earnings estimate has stabilized in recent weeks, it remains well below the same period of 12 months prior. Moreover, the stock's 17.8% trailing gross margin metric is worrying, so further deterioration here will most likely result in the MACD indicator delivering a sell signal.
Lower Cash Flow Generation
Suffice it to say, a sustained move to the upside will only take place if the relationship between Ball's profitability and valuation is attractive from a risk/reward standpoint. From a sales and assets standpoint (forward sales and book multiples of 1.17 and 5.09, respectively), shares actually do not appear overly expensive. In fact, on the assets side, one may state that the balance sheet is in better shape than the reported book multiple due to how treasury stock has been rising at the company.
However, it is the cash flow multiple (trailing multiple of 27.41) which is well ahead of what we have seen in this play in recent times (5-year average of 16.42). Although this multiple is expected to come down going forward, the market will need to see improving trends here in Q4 to ensure sustained investment can continue going forward.
Management cited the reduction in metal purchases (resulting in improving working capital) as well as the forward-looking lower capex spending as reasons why cash flow numbers will improve going forward. While this may be true over the near term, there is no guarantee that working capital numbers will continue to improve indefinitely. Supply chain headwinds and interest rate increases remain elevated risks in the context of BALL potentially having to tie up far more capital to maintain operational efficiency.
Apart from these improvements, however, sustained free cash flow generation will be needed to deliver management's goal of a 10% to 15% annual EPS growth target going forward. Through a combination of sustained share repurchases, operational efficiency, and organic capex growth, management believes it can deliver double-digit bottom line growth as we see below.
Debt On The Rise
The problem the market has at present is that it does not see enough of this happening in real-time. The number of shares outstanding, for example, has not changed much since Ball's most recent third-quarter earnings report (314 million), and operational cash flow stooped to $174 million in the third quarter. This means that operating cash flow over the past four quarters now comes in at $660 million, which is well over a billion behind the same metric in fiscal 2021.
We must also remember that debt has been creeping up in the firm, with total debt to equity now surpassing 260% as opposed to an average of approximately 230% over the past five years. Higher debt is another impediment to bottom line growth, so the market will be watching this area with interest in the upcoming fourth-quarter earnings report.
Therefore, how do we play this from a post-earnings perspective? Since the 52-week IV rank is approximately 55 and the options' volume is insignificant, trading options in BALL per the announcement is not recommended. However, given the existing trend of lower lows, a disappointing EPS number may result in a convincing sell signal by means of something like a MACD bearish crossover.
Conclusion
Therefore, to sum up, we maintain that Ball Corporation needs an impressive fourth-quarter earnings report to keep the bears at bay. Shares remain well below their 200-day moving average and below the stock's January highs. Let's see what Q4 brings. We look forward to continued coverage.
For further details see:
Ball Corporation: Upcoming Q4 Numbers Need To Be Encouraging