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Morningstar | Weak European Food Results Weigh on an Otherwise Decent 2Q for Crown

Crown reported soft second-quarter results, with consolidated segment operating income and sales down slightly from the prior-year period. The principal drag on results was the European food segment, where sales fell 6% and segment operating margins contracted substantially. While this will be a significant headwind in 2019, one bad year for product-specific food demand doesn't mean results will remain weak. Accordingly, our broader outlook for Crown is unchanged and we're maintaining our $55 per share fair value estimate. Our narrow moat rating is also intact.

We think management's revised 2019 adjusted EPS guidance of $5.05 to $5.20 will be attainable, having been reduced from $5.20 to $5.40 previously. We now expect adjusted EPS of $5.10, down from our prior forecast of $5.28. An increase in capital spending expectations to $440 million during 2019, up by about $25 million from prior guidance, will also weigh on cash flows. The increased investment appears to be justified, however, as it's being deployed to increase specialty-can volumes in North America for existing customers. The investment should support volumes and operating margins in the Americas beverage segment starting in mid-2020.

More broadly, beverage-can demand remains solid. Management called out strong performance in Brazil, Europe, and Southeast Asia, as evidenced in solid performance across the beverage segments. We remain particularly bullish on Crown's exposure to Southeast Asia, where above-average population growth and rising consumption patterns are poised to boost beverage-can volumes. Crown commands an enviable competitive positioning, with a dominant presence in numerous countries throughout the region, including Vietnam and Cambodia.

Weakness in European food results was driven by both an unfavorable mix shift and cost inflation that hasn't been fully passed through to customers in price. The mix shift was driven by a better-than-expected vegetable harvest and a reduced dairy mix. For cost inflation, we view the issue as entirely transitory. As is typical for cans, cost inflation is gradually passed through existing contracts, but the lag can cause a quarter or two of under- and outperformance. The mix impact is also likely to prove transitory, as management didn't call out any customer losses and is likely attributable to either timing or a temporary period of weaker production.