Owens-Illinois Rides on Favorable Demand, High Debt a Woe

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On Nov 22, we issued an updated research report on Owens-Illinois, Inc.OI . The company will benefit from its ongoing successful joint venture ("JV") with Constellation Brands, Inc. STZ , growing preference for glass packaging and its Total System Cost approach. However, unfavorable foreign currency, substantial freight inflation, continued decline of beer in the domestic marketremain concerns.

FX, Freight Inflation to Hurt 2018 Earnings

Owens-Illinois lowered adjusted earnings per share guidance range to $2.72-$2.78 for 2018 from its previous guidance of $2.75-$2.85. Unfavorable foreign currency will continue to be a headwind in fiscal 2018. Moreover, the company continues to face substantial freight inflation in the United States. Further, poor grape harvest in Europe in 2017 is affecting wine volumes in the region in 2018. The continued decline of beer in the domestic market also remains a major headwind. The Zacks Consensus Estimate for fiscal 2018 is $2.74, reflecting year-over-year growth of 3.4%.

Poised for a Better 2019

In 2019, the company anticipates top-line growth and margin expansion driven by its Total System Cost approach ("TSC") and footprint optimization. The company expects earnings per share of around $3.00 in fiscal 2019. It anticipates about 1% volume organic growth in its legacy volumes and continued growth in the JV with Constellation Brands in the fiscal. In Europe, wine sales will be higher in 2019 due to the strong grape harvest in 2018. Further, glass packaging in Western Europe has been growing for last two years - in line with total packaging. Premium products in Europe are growing significantly faster than overall market. The company's efforts to add capacity in Europe, supply chain performance, and footprint optimization poises it well for growing volumes and expanding margins in the region.

Considering the improving market demand in Mexico and Brazil, the company is adding capacity. In the United States, demand for glass is improving bolstered by favorable consumer trends and increased preference of customers for glass packaging. Non-beer categories in the United States continue to grow at low-single digits over time. Consequently, the company has been focusing on these categories by improving customer relationships, commercial and design capabilities, and converting almost 20% of its beer capacity into flexible capacity to meet non-beer customer demand. Overall, the Americas are expected to generate higher sales, profit and margin in the coming year.

In Asia Pacific, growing demand in emerging markets will drive volumes. Owens-Illinois has completed its asset improvements program in the region, and expects higher volumes and lower manufacturing expense to drive margins higher going forward.

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 and long-term sales contracts in Mexico. The JV has exceeded expectations so far - productivity has been higher than anticipated, capital costs were considerably lesser than initially expected and earnings have been growing every year.

The company has built four furnaces at the JV in just four years and is currently building a fifth furnace that is expected to come on line in the second half of 2009. The fifth furnace will help cater to the rising demand from Constellation`s adjacent brewery. With the installation of the fifth furnace, the Nava plant will be the largest, most modern glass container factory globally. The total cost of approximately $140 million, will be financed by equal contributions from both partners.

Few Headwinds Linger

Despite Owens-Illinois' deleveraging and refinancing actions in the past 12 months, its debt-to-capitalization ratio remains high at 84%. 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. Also, continued decline of beer in the domestic market remains a major headwind.

Share Price Performance

Shares of Owens-Illinois have dropped 24% in the past year, compared with the industry 's decline of 25%.

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

Stocks to Consider

Some better-ranked stocks in the same sector are CECO Environmental Corp. CECE and Cintas Corporation CTAS . Both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

CECO has a long-term earnings growth rate of 15%. The company's shares have surged 51%, in the past year.

Cintas has a long-term earnings growth rate of 12%. Its shares have rallied 23%, over the past year.

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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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