EUR 850.00 For Business Accounts Only

Morningstar | Crown's Profitability Remains Pressured Despite Global Volume Growth; Maintaining $59 FVE

Crown's third quarter was no blockbuster, but performance remained decent in light of mounting emerging-market concerns. On the balance, we were pleased to see global beverage can volumes rise 3% versus the prior year, fueled by capital projects and increased carbonated beverage consumption. Offsetting these factors were higher North American freight costs, poor food can sales in Europe, and hurricane impacts. Our long-term forecasts for Crown are unchanged, and we view the stock as undervalued at today's prices. We maintain our $59 per share fair value estimate and narrow moat rating on Crown Holdings.

On the beverage side of the business, volumes grew 3% versus the prior year. In contrast with the more typical 1%-2% of recent years, we view this as a solid performance. Americas volumes rose by 4%-6%, while Europe was down around 1%. Over time, we expect Europe to turn positive as Crown's Middle Eastern operations shrink and demand very gradually increases in continental Europe. Income for the Americas beverage segment declined roughly 5% versus the prior year to $125 million, and European beverage segment income fell 15% to $66 million.

European food profits weakened substantially during the third quarter. Sales fell 3% from the prior year, with segment income down 6% to $90 million. Volumes fell a substantial 7% due to a severe drought, leading to far less vegetable and fruit canning than usual. Naturally, this is only a one-time event that should not recur often.

Transit segment income remained roughly flat versus the prior year, while Asia-Pacific segment income rose a solid 15%, though it remains Crown's smallest segment.

We expect Crown's volumes and operating margins to exceed the market's current expectations. Despite pockets of volume weakness in both beverage and food can demand, the company's exposure to a wide variety of emerging markets should easily support our long-term revenue growth estimate of roughly 3.5% per year.

Our $59 per share valuation also assumes only a modest 30-basis-point increase in operating margins to 12.4% by 2022. With the stock trading more than 20% below our fair value estimate, we believe shares offer meaningful upside to investors.