- Ball Corp. is driven by canned beverage volumes, with a modest, but persistent uplift owing to a long-term shift from glass and plastic beverage packaging to aluminum.
- BALL stock has struggled significantly over the past 18 months.
- A big part of my enthusiasm for Ball today is the expected removal of a series of temporary but noisy headwinds.
- I am particularly excited to be a shareholder in Ball, a business I've long followed and admired but never owned due to the price tag.
The following segment was excerpted from this fund letter .
Ball Corp. ( BALL )
Ball is a simple business, focused primarily on producing beverage cans (90% of segment earnings, with the remainder largely focused on niche aerospace instruments, sensors, and spacecraft). An aggressively un-sexy business, "bevcans" is an attractive niche with historically low sensitivity to macro volatility and solid pricing power (due to tight contractual pass-through of raw material costs and a highly consolidated industry). Barriers to entry aren't particularly high, but it is challenging for sub-scale entrants to compete and operate efficiently vs. large global players such as Ball.
At its foundation, the business is driven by canned beverage (beer, soft/energy drinks, etc.) volumes, with a modest, but persistent uplift owing to a long-term shift from glass and plastic beverage packaging to aluminum (lighter, easier to recycle, and less energy-intensive). No surprise, the core of Upslope's thesis isn't about heart-racing upside so much as it is about owning a well-managed, attractive business with limited downside and a history of double-digit free cash flow growth.
Ball shares have struggled significantly over the past 18 months. 2021 was the stock's worst year of relative (vs. S&P 500) underperformance since at least 2000 (a fun fact for those of us that believe we just concluded Tech Bubble 2.0). 2022 kicked off similarly. While the S&P 500 itself saw one of its worst starts to a year ever, Ball shares underperformed even that by an additional 11% (-30% in 1H). Much of this was, in my view, due to a badly needed correction of over-valuation.
In recent years Ball became an "ESG" darling, owing to its (logical) messaging around sustainability, as well as its steady performance through COVID-era macro volatility. This exuberance has finally been corrected, in my view. A big part of my enthusiasm for Ball today is the expected removal of a series of temporary but noisy headwinds. Among them:
- concern over Russian operations (<5% of sales and expected to exit)
- weakness in Brazil (historically volatile and nothing new also consistent with competitor's experience), and
- inflationary pressures (headwind to margins that should ultimately be recouped).
On top of these concerns, investors (including myself) have eyed significant bevcan industry capacity expansions in recent years with some concern and skepticism. To date, industry expansion has not been speculative and has been tied directly to contracted new volumes.
While it remains an issue to watch, I believe:
- it's very widely known and largely priced in today, and
- we could see some capacity expansion pauses or reversals in the periods ahead (which would be cheered by investors).
Aside from fading headwinds, there are plenty of reasons to like Ball as a business and stock.
- First, as noted, Ball's business is largely driven by canned beverage volumes, which tend not to be particularly cyclical, and are bolstered by the steady shift towards aluminum beverage packaging.
- Second, Ball has historically been viewed as the best-managed packager with a disciplined, ROIC-focused management team. I have long agreed with this assessment, but believe the stock is no longer priced as such today.
- Third, despite tough sledding for shares of late, I believe Ball is exactly the type of stock that should thrive on at least a relative basis in today's uncertain macro environment. The core is defensive and the business is better insulated against inflationary and recessionary headwinds than most. The company can also thrive should macro concerns subside.
- Finally, Ball's niche Aerospace segment remains an obvious source of optionality, given the geopolitical climate and investors' lack of focus on it.
Exhibit 1: Steady Earnings per Share (Adj.) through Economic Cycles
Key risks for Ball shares include:
- "Peak cycle" concerns, including: Ball's purchase of arena naming rights (in Denver), CEO retirement, industry capacity expansion, and previously intense ESG interest. While these are still risks, I believe downside is far more limited today at half of the peak multiple.
- Further valuation compression is also possible. I see this happening largely in a scenario where the broader market completely falls apart - during which Ball would almost certainly outperform.
- Relatively new CEO (was head of bevcans for years and the logical successor to prior CEO).
- Correlation to existing Upslope "packaging" longs. Ball is indeed more correlated to these positions than other Upslope longs; however, each has a different end market focus (Aptar = pharma, Silgan = food, Ball = beverage).
- FX translation headwinds due to the global nature of the business.
Despite near-term uncertainty, I am particularly excited to be a shareholder in Ball, a business I've long followed and admired but never owned due to the price tag. While the best opportunities in bear markets tend to be found in beaten up shares of high-risk cyclicals, the unique circumstances Ball has faced in recent years have afforded us an unusual opportunity to own shares of a steady, predictable business at a discount - precisely when such predictability should be uniquely valuable.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Upslope Capital - Ball Corp.: A Steady, Predictable Business At A Discount