2023-07-10 17:53:51 ET
Summary
- Ball Corporation's share price has declined over 40% from its historical high in 2021 due to macro headwinds.
- The adoption of aluminum cans should continue to increase amid advantages such as great recyclability and malleability.
- The slowing global economy is putting meaningful pressure on the company's shipment volume as demand remains soft.
- Latest earnings remain underwhelming but valuation is starting to look discounted, which should offer some downside protection.
Investment Thesis
Ball Corporation ( BALL ) is now down over 40% from its all-time high in 2021, as high inflation and the slowing global economy continue to weigh on its performance. Despite the huge decline in share price, the company still looks like a mixed opportunity in my opinion. While the increasing adoption of aluminum can should be a solid long-term tailwind, the slowing global economy will likely weigh on demand in the near term. The current discounted valuation should offer some downside protection, but I also do not see much upside potential until financials improve.
Growing Adoption Of Aluminum Can
Ball Corporation is a Colorado-based company that specializes in aluminum packaging products. The company mostly operates in beverage packaging but also has a presence in household products and aerospace. Its current customers include multiple blue-chip companies such as Monster Beverage ( MNST ), Procter & Gamble ( PG ), and Boeing ( BA ). The beverage can market is mundane but also large and expanding. According to Grand View Research , its global market size is forecasted to grow from $41.1 billion in 2023 to $59.6 billion in 2023, representing a solid CAGR (compounded annual growth rate) of 5.3%.
The growth is mostly driven by the increasing adoption of aluminum cans, as it offers multiple advantages. For instance, the nature of aluminum allows cans to be easily cooled or heated. It is also much more environmentally friendly, with an average recycling rate of 60%, significantly higher than other packaging materials. According to the American Aluminum Association , the US currently recycles more than 5 million tons of aluminum annually.
The particularly strong growth of energy drinks is also another driver for the market expansion of beverage cans. According to Allied Market Research , the industry is expected to grow at a long-term CAGR of 7.2% amid the rising popularity among younger generations. I believe the increasing usage of aluminum can should be a meaningful long-term tailwind for the company.
High Exposure To The Economy
While Ball Corporation’s long-term prospect is solid, the near-term outlook looks a lot less favorable. Due to elevated inflation, demand for beverages continues to be soft, as consumers are becoming more cautious about spending. This is in turn hurting the company's shipment volume. Beverage brands such as Coca-Cola ( KO ) and PepsiCo ( PEP ) have been able to drastically raise prices to offset the slowdown in volume, but Ball Corporation does not have the luxury to do so.
Inflation has been easing across the globe, but most economies remain pretty weak. For instance, all 20 countries in the eurozone are now in a recession . It is worth noting that the company’s customer base is extremely diverse, which makes it highly exposed to different economies. During the latest quarter , North and Central America accounted for around 54% of beverage packaging revenue, while EMEA (Europe, Middle East, and Africa) and South America accounted for 30% and 16% respectively. Therefore, the sole resilience of the US will not be enough to support the company’s financials.
Financials and Valuation
Ball Corporation's latest earnings were pretty underwhelming, as economic headwinds continue to weigh meaningfully on growth. The company reported revenue of $3.49 billion, down 6.2% YoY (year over year) compared to $3.72 billion. The overall beverage packaging business declined 8.5% from $3.05 billion to $2.79 billion, as demand remains weak. For instance, global beverage can shipments dropped 6.7% YoY. Excluding the impact of its Russian business divestment, shipments dropped 1.4% YoY. Aerospace revenue was flat YoY at $500 million, as its $2.8 billion backlog provided great stability.
The bottom line performed slightly better due to cost-cutting initiatives. For instance, the costs of sales declined 5.6% YoY from $3.02 billion to $2.85 billion. SG&A (selling, general, and administrative) expenses also decreased 29.6% from $186 million to $131 million. This resulted in the adjusted EBITDA being flat YoY at $510 million. The adjusted EBITDA margin expanded 90 basis points from 13.7% to 14.6%. The net income declined 13.9% YoY from $252 million to $217 million, largely due to higher tax expenses. The adjusted diluted EPS was $0.69 compared to $0.77, down 10.4% YoY.
After the drastic decline in share price, Ball Corporation's valuation is starting to look discounted in my opinion. The company is currently trading at an fwd PE ratio of 18.7x, which is cheap on a historical basis. As shown in the chart below, the multiple represents a meaningful discount of 19.4% compared to its 5-year average fwd PE ratio of 23.2x. However, it should be unlikely to see a multiple expansion due to the soft financials.
Investors Takeaway
Ball Corporation is a solid company but I do not think now is the right time to jump in. The company is well-positioned to benefit from the rising adoption of aluminum cans, but the near-term headwind is a major concern.
The economy in many countries has been deteriorating and there is also a potential recession looming in the US. This should continue to weigh heavily on the company as demand remains weak. The impact is shown in the company's latest earnings, with lower shipment volume dragging on sales. The discounted valuation should limit the downside, but upside should also be muted amid the lack of growth. Due to the company's high exposure to the economy, I believe it will be wise to wait for an economic rebound before entering. Therefore, I rate Ball Corporation as a hold for now.
For further details see:
Ball Corporation: Waiting For The Economy To Rebound