Owens-Illinois Bets on Strategic Initiatives, High Debt a Woe

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On Aug 28, we issued an updated research report on Owens-Illinois, Inc.OI . The company will benefit from the extension and expansion of joint venture (JV) with Constellation Brands, Inc. STZ , acquisition of Vitro's food and beverage business as well as strategic initiatives. The company is improving productivity across all businesses, functions, processes and geographies. However, continued decline of beer consumption in domestic market and high-debt levels remain concerns.

Y/Y Improvement in Q2 Results

Owens-Illinois delivered second-quarter 2018 adjusted earnings of 77 cents per share, up 3% year over year. The reported figure also exceeded management's guidance as well as the Zacks Consensus Estimate, both of which were pegged at 75 cents.

Focus on Total Systems Costs to Aid Results, FX Ail

In fiscal 2018, the company will continue to realize benefits from successful execution of its strategic initiatives in commercial programs and end-to-end supply chain management. Its focus on Total Systems Cost ("TSC") contributed approximately $39 million during 2017. Taking into account higher spending on engineering activity and factory expansion, the company projects incremental benefit of $30 million in 2018. Overall in 2018, positive trends in volumes and focus on Total System Costs is likely to lead to higher earnings and cash flow.

The company guides adjusted earnings in the range of $2.75-$2.85 per share for 2018. However, Owens-Illinois anticipates the results to be on the lower end of the range due to negative impact of foreign currency exchange rates. The Zacks Consensus Estimate for the fiscal is at $2.75, reflecting year-over-year growth 3.8%.

Successful JV with Constellation to Drive Growth

Owens-Illinois continues to mitigate the impact of the ongoing decline in mega beer in the United States by positioning itself to benefit from the rapidly growing market of U.S. beer imports. It intends to achieve this through its JV with Constellation Brands and long-term sales contracts in Mexico. The company's extension of the 50-50 JV with Constellation Brands for an additional 10 years (to 2034) and expansion to include an additional furnace is likely to be earnings accretive in the future.

The JV was formed in 2014 and currently operates a glass container production plant in Nava, Mexico. The plant provides bottles exclusively for Constellation's adjacent brewery, which brews a leading portfolio of Mexican beer brands for export to the United States, the fastest growing category in beer in the country. The venture successfully ramped up its fourth furnace in first quarter-2018. The JV has exceeded expectations so far - productivity has been higher than expected, capital costs were considerably lesser than initially anticipated and earnings have been improving every year.

To cater to the rising demand from Constellation`s adjacent brewery, the newly-expanded relationship will now add a fifth furnace, which is projected to be operational by the end of 2019. With the installation of the fifth furnace, the Nava plant will be the largest, most modern glass container factory globally.

Acquisition of Vitro's Food and Beverage Business: A Wise Move

Owen-Illinois' acquisition of Vitro's food and beverage business has provided it a competitive edge in the attractive and growing glass segment of the packaging market in Mexico. Further, it reinforces Owens-Illinois' position as the world's leading glass container producer. The company anticipates realizing around $30 million in run-rate cost synergies by 2018 through both procurement savings and operating efficiencies. It is likely to contribute about 50 cents per share in 2018, while generating at least $100 million in free cash flow by 2018.

Few Headwinds Linger

Despite Owens-Illinois' deleveraging and refinancing actions in the past 12 months, its debt-to-capitalization ratio remains high at 86%. Higher interest levels will impact its margins. Further, its margins will bear the impact of the company's incremental investments in R&D in the near-term.

Owens-Illinois faces intense competition from manufacturers of alternative forms of packaging, such as aluminum cans and plastic containers, persists. Advantages in price, quality, and functional attributes of these alternative containers may lead to customers considering a change of suppliers or the form of packaging, which could affect Owens-Illinois.

The continued decline of beer in the domestic market remains a major headwind. Shares of Owens-Illinois have dropped 24% in the past year, compared with the industry 's decline of 14%.

Owens-Illinois carries a Zacks Rank #3 (Hold).

Other Stocks

Some better-ranked stocks in the sector include W.W. Grainger, Inc. GWW and Atkore International Group Inc. ATKR . Both the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Grainger has a long-term earnings growth rate of 12.5%. Its shares have appreciated a whopping 130% over the past year.

Atkore International has a long-term earnings growth rate of 10%. The stock has rallied 69% in a year's time.

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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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