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Morningstar | Crown's 4Q Falls Short of Our Expectations; Reducing our FVE to $53 on Forecast Changes. See Updated Analyst Note from 07 Feb 2019

Fourth-quarter results for Crown fell short of our expectations, driven mostly by especially weak results in the European food and beverage segments. We think both events are largely short-term in nature, driven by elevated startup costs in European beverage, and a weak harvest in Europe for food. Unrelated to Crown's fourth-quarter results, we've reduced our fair value estimate to $53 per share from $59, though its narrow moat rating is unchanged. Our fair value reduction is largely driven by expectations of lower overall top-line growth, and lower midcycle margin assumptions in Crown's transit packaging business.

European beverage results were disappointing, with segment income falling to just $13 million in the fourth quarter from $38 million last year. The primary driver of weakness was a significant increase in startup costs associated with capacity growth in continental Europe--matched with sustained softness in Middle Eastern volumes. Management has guided to expect weaker margins throughout the early portion of 2019 due to elevated startup costs, after which point the segment should begin to see a pickup in both revenue and segment income. We think Middle-Eastern volume weakness should ease, as the company starts to lap weak results from the prior year.

Our forecasts have fallen across the broader business to account for more accurate estimates for both volume and inflationary pass-throughs over the long-run. We've reduced the amount of inflationary revenue growth we expect to better align with long-term cost trends for aluminum. We've also recalibrated beverage volume growth estimates (lower in Americas and Europe, higher in Asia Pacific) based on country-level forecasts of both population growth and per-capita beverage consumption patterns.

The other moving piece for 2019 will be Crown's planned relocation of two beverage can plants from China to Southeast Asia. The increased costs from the move will offset organic growth within the segment, leaving segment operating income essentially flat. In the long-run, however, we think this will support segment margin expansion. Chinese beverage can markets are notoriously competitive, making even the most efficiently run plants less profitable due to excess state owned capacity that weighs on margins for all producers. Moving these assets in Southeast Asia, where Crown already has a substantial presence, should bring segment profit margins closer to 15% over time as the plants will operate in a more balanced environment.