Morningstar | BLL Updated Star Rating from 03 May 2019
Ball started 2019 on firm footing, with most of the business performing solidly. In part, this is attributable to strong tailwinds for the beverage can in general. A renewed global focus on sustainability and recycling seems to be spurring beverage can sales higher, rising a remarkable 8% for Ball during the first quarter. Aerospace results were similarly solid. The only detractor in the quarter was a negative impact from changing spreads between aluminum scrap prices and benchmarks, and operational challenges at the company's new specialty facility in North America. We've slightly reduced our fair value estimate to $44 per share from $45, after revising our near-term North and Central America forecasts downward. Our narrow moat rating is unchanged.Today's positive market reaction was likely attributable to the tremendous Aerospace revenue and earnings growth. We were impressed too, although we think Ball's current share price implies too much upside for the segment. We've raised our outlook to an average of 15% sales growth, annually, over the coming three years. We've also raised our midcycle operating margin for the segment to 11.5%, or 1.7% higher than the trailing 10-year average for the segment. These changes are predicated on an increased backlog, rising headcount, and benefits of operating leverage. Even then, our fair value remains well below the prevailing share price of roughly $60 per share. Accordingly, we caution investors that shares look overvalued.
We believe the struggles in American beverage will mostly prove transitory. Ball has already made clear that next year's contracts will capture the issues recently faced by changing scrap aluminum spreads, which will mitigate this quarter's margin problems - though they may persist in 2019 until those contracts are effective. High change-over times at the new facility can likely be chalked up to a combination of newer employees and tweaking the product mix, and should pass in the coming quarters.
Ball supplies metal packaging to the beverage, personal care and household products industries. The company provides aerospace and other technologies and services. The company's main product line is aluminum beverage containers. The company also produces aerosol containers, extruded aluminum aerosol containers and aluminum slugs. The company's segments are: beverage packaging, North and Central America, beverage packaging, South America, and beverage packaging, Europe, all of which are engaged in manufacturing and selling aluminum beverage containers; and aerospace, which manufactures and sells aerospace and other related products and provides services used in the defense, civil space and commercial space industries.
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