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Morningstar | Ball Manages Strong 3Q as Management Continues to Hone Post-Merger Footprint

Ball's third quarter was surprisingly strong, with the firm performing particularly well in its two developed market beverage segments, while emerging markets were somewhat weaker. The company also completed the divestiture of its steel food and aerosol business into a joint venture structure, eliminating one of its segments. Net sales rose just over 1% versus the prior year, while comparable operating earnings climbed a fairly impressive 13%. While management is still incurring meaningful one-time costs to transform the business after closing its deal to purchase Rexam, we think moves to consolidate its footprint and remove its poorest performing assets will reward shareholders. To account for better-than-expected results in the Americas and Europe, we've modestly increased our fair value to $40.50 per share from $39, and leave our narrow moat rating in place.

Beverage packaging performance was strong in North and Central America, partly attributable to fewer hurricane disruptions to their operations versus the year prior. There was the added benefit of 2% volume growth, attributable to a market mix shift from glass and PET to aluminum, depending on category. Next year, the segment will benefit from the startup of a new Arizona facility, and the closure of two older facilities. While we expect this to be a margin tailwind in the near term, we still believe that profit margins could slip over time as consumer preferences in favor of water weigh on operating rates in pockets of the region.

South American results were somewhat softer than we expected, which we expect to be temporary. Elevated startup costs with expansions in Argentina and Paraguay, and footprint relocation should roll off results in the coming year. Economic turmoil in Brazil and currency fluctuations certainly didn't make things easier. European results were an offset, with volumes rising a substantial 10% as a new facility in Spain ramped up and mix-shift remained favorable for aluminum cans.