Crown Holdings to Gain on Rising Demand Despite Cost Woes

On Mar 7, we issued an updated research report on Crown Holdings Inc.CCK . The company is expected to benefit from geographic expansion of its beverage can lines which will aid it to capitalize on the rise in global beverage can demand. However, raw material inflation and competition from producers of alternative packaging remain headwinds.

Q4 Results Rise Y/Y

The leading global manufacturer of packaging products for consumer goods delivered fourth-quarter 2017 adjusted earnings per share of 79 cents, which came in line with the Zacks Consensus Estimate and recorded an improvement of 11.3% on a year-over-year basis. Net sales in the quarter rose 12.7% year over year to $2,168 million, surpassing the Zacks Consensus Estimate of $2,034 million. Sales growth was driven by improved global beverage can volumes, food and aerosol can volumes, as well as the pass through of higher material costs to customers and favorable impact of currency translation.

Upbeat Guidance

Crown Holdings initiated adjusted diluted earnings per share guidance range of $4.30-$4.50 for full-year 2018, reflecting 9% year-over-year growth at the mid-point. It also projects first-quarter 2018 earnings per share in the range of 75-85 cents, flat year over year at the mid-point.

Investment in Capacity Will Help Meet Growing Demand

Crown Holdings is anticipated to gain from a rise in global beverage can demand. Beverage can volume has continued to grow in emerging markets driven by increased per capita incomes and consumption. Mature economies in Europe and North America have also witnessed market expansion led by growth of beverages such as energy drinks, teas, juices, sparkling waters and craft beer. With its many inherent benefits, including being infinitely recyclable, the beverage can continues to become the increasingly preferred package for marketers and consumers globally.

To meet growing demand, the company intends to build new facilities and is positioned to gain from the geographic expansion of its beverage can lines. In 2017, it started operating a two-line beverage can plant in Nichols, NY, converted a second beverage can line in Custines, France from steel to aluminum and completed the expansion of the beverage can capacity in Columbia. The company also commenced a one-line beverage can facility in Jakarta, Indonesia and added a second production line to its Danang, Vietnam beverage can plant.

In January 2018, the new glass facility in Chihuahua, Mexico started operations, ahead of schedule, to cater to the expanding beer market in the northern part of the country. With this investment, Crown Holdings is foraying into glass operations in Mexico. A new beverage can plant is being built in Yangon, Myanmar, which is anticipated to commence production in the second quarter of 2018. A new two-line beverage can facility in Valencia, Spain is slated to start operation during the fourth quarter. Crown Holdings will construct a third beverage can line at its existing plant in Phnom Penh, Cambodia.

Pending Signode Acquisition to Fuel Growth

In December 2017, Crown Holdings agreed to acquire Signode Industrial Group Holdings - a unit of The Carlyle Group for $3.91 billion. This acquisition will add a portfolio of premier transit and protective packaging franchises to Crown Holdings' metal packaging business and significantly boost free cash flow. Signode's products supply critical in-transit protection to high value, high volume goods across a number of end-markets, including metals, food and beverage, corrugated, construction and agriculture, among others.

High Debt Levels a Concern

Crown Holdings' debt-to-capitalization ratio remains high at 85%. This is a concerning factor as it could restrict the company from making strategic acquisitions or exploiting business opportunities, including any planned expansion in emerging markets. Further, higher interest expenses will continue to thwart margins.

Raw Material Inflation to Dent Margins

The prices of certain raw materials utilized by the company, such as steel, aluminum and processed energy, have historically been subject to volatility. In 2017, consumption of steel and aluminum represented 21% and 42% of its consolidated cost of products sold, respectively. Signode, which will become its subsidiary following the completion of the acquisition, also uses steel and materials derived from crude oil and natural gas, such as polyethylene and polypropylene resins. The company may not be able to pass through the increase in raw materials costs to its customers, without suffering loss in unit volume, revenues and operating income.

Constant Threat from Alternate Packaging Manufacturers

Crown Holdings faces substantial competition from producers of alternative packaging made from glass, paper, flexible materials and plastic. Further, Signode which will become a subsidiary after the acquisition faces substantial competition from many regional and local competitors of various sizes in the manufacture, distribution and sale of its products. Signode products also compete, to some extent, with various other packaging materials, including other products made of paper, plastics, wood and various types of metal.

Crown Holdings has underperformed the industry it belongs to over the past year. Its shares have dipped 5% while the industry gained 6%.

Crown Holdings currently holds a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the same sector include Mobile Mini, Inc. MINI , AptarGroup, Inc. ATR and Packaging Corporation of America PKG . While Mobile Mini flaunts a Zacks Rank #1 (Strong Buy), AptarGroup and Packaging Corporation of America carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Mobile Mini has a long-term earnings growth rate of 14%. The company's shares have rallied 40% in a year's time.

AptarGroup has a long-term earnings growth rate of 8.5%. Its shares have been up 19% in the past year.

Packaging Corporation of America has a long-term earnings growth rate of 8.3%. Over a year's time, shares of the company have gained 27%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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