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Morningstar | Asia-Pacific Performance Rebounds as Owens-Illinois' 2018 Lines Up With Our Expectations

Owens-Illinois' fourth quarter wrapped up a year that largely aligned with our expectations. Despite essentially flat sales at $6.9 billion, adjusted EPS rose just under 3% versus the prior year to $2.72. Outside of the Americas segment, where comparability is hindered by the transfer of assets into a joint venture, performance improved in the European and Asia-Pacific segments. Lower operating costs helped margins in Europe, while the completion of restructuring efforts in Asia appears to have returned margins to the midteens as we expected. With our forecasts largely unchanged, we maintain our $19.50 fair value estimate and narrow moat rating.

We were most impressed by the margin recovery in Asia-Pacific during the final quarter of 2018. Segment operating profit doubled to $28 million from the prior year, rising principally on far lower operating costs. That translates to a 15% operating margin, a level OI has not achieved in over two years. We believe OI will hold on to those gains in 2019, leading to a substantial rise in segment operating profit and contributing meaningfully to annual earnings growth for the business.

In the Americas, results were clouded by the transfer of furnace assets into the joint venture with Constellation Brands, driving a volume decline for the quarter and year. Operating costs also exceeded efforts to pass on price increases, driven by higher natural gas prices that don't affect other beverage packaging substrates such as aluminum cans.

In Europe, additional efforts to strip costs and raise prices simultaneously paid off, boosting fourth-quarter margins for the segment. Management indicated that regional capacity is tight, boosting operating rates for OI and providing modest pricing power. However, we see lower segment margins over the long run as glass loses market share, which will reduce operating rates and pressure margins.