Morningstar | Weaker Volumes and Currency Headwinds Have an Impact on Owens-Illinois in 3Q; Lowering FVE to $19.50
Owens-Illinois' third-quarter results were relatively soft. Volumes were down across each segment and the relative strength of the U.S. dollar created a meaningful currency headwind. This was more than enough to offset a roughly 2% increase in average pricing. Consolidated sales fell just over 2% from the prior year, with segment operating profit down around $5 million to $255 million in the third quarter. Based on our updated assumptions surrounding future translated profits, and a slightly weaker volume outlook in 2018, we've reduced our fair value estimate to $19.50 per share from $21. We've left our narrow-moat rating unchanged.While Owens-Illinois' volume declines are somewhat disappointing, we think the market's negative reaction overstates the impact to the underlying business. Weaker mainstream beer consumption persisted in third-quarter results, although the company is actively rightsizing its Americas segment operations as needed to preserve profit margins. For example, its third-quarter closure of an Atlanta facility should help with that as we make our way into 2019. European volumes also suffered because of lower wine bottling volumes, which reflects a relatively poor 2017 harvest. However, we do think glass will have to fight for share over time. We expect margins to contract across both the company's Americas and European segments. Even under these conditions, we think Owens-Illinois will manage to narrowly outearn its cost of capital.
We believe a bright spot going forward will be Asia-Pacific segment performance, which has been a drag since 2016. Management's efforts to clean up and improve operations should boost margins substantially next quarter, and nearly double margins in 2019 versus 2018. We expect this region, along with Latin America, to be a key driver of volume and profit growth going forward. In contrast, North America and Europe will deliver flat to negative volume growth.
Owens-Illinois is a manufacturer of glass containers. The company has three reportable segments based on its geographic locations: Americas, Europe, and Asia Pacific. The company produces glass containers for alcoholic beverages, including beer, flavored malt beverages, spirits and wine. The company also produces glass packaging for a variety of food items, soft drinks, teas, juices and pharmaceuticals. The company manufactures glass containers in a range of sizes, shapes and colors. The company also provides engineering support for its glass manufacturing operations through facilities located in the U.S., Australia, France, Poland and Peru.
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