Owens-Illinois (OI) Down 47% in a Year: Will it Bounce Back?

Shares of Owens-Illinois, Inc. OI have not been performing well for the past year. This glass container manufacturer stock is down 46.7% over the past year compared with the stocks in the industry that posted a cumulative decline of 35.4%. This downside is partly due to the muted guidance for the current year due to the impact of foreign-exchange headwinds, higher tax rate and negative impact of increased operational complexity on account of change in mix. Further, decline of beer consumption in the domestic market remains another major headwind.

Factors Plaguing Owens-Illinois

Owens-Illinois’ shares plunged 41% since it reported second-quarter 2019 results on Jul 31. The company reported adjusted earnings of 69 cents per share in the quarter, down 10% from the prior year. Net sales declined 1% year over year to $1,756 million, as favorable pricing was offset by unfavorable currency translation.

Moreover, net sales in the first six months of 2019 were down 3% from the same period in 2018, primarily due to the unfavorable impact of changes in foreign currency-exchange rates and lower volumes, partially offset by higher prices. Volume growth is projected at 0.5% for 2019, lower than the previous outlook of 1.5%. The continued decline of beer consumption in the domestic market remains a major headwind.

For third-quarter 2019, Owens-Illinois anticipates adjusted earnings per share of 60-65 cents compared with adjusted earnings of 62 cents per share reported in third-quarter 2018. The benefit of higher selling prices, sales volume and accretion from Nueva Fanal acquisition will likely be offset by elevated operating costs and higher effective tax rate related to shifts in regional earnings mix.

Furthermore, the company lowered its adjusted earnings per guidance to $2.40-$2.55 from the prior estimate of $3.00, due to foreign-exchange headwinds, higher effective tax rate and impact of continued increased complexity. Owens-Illinois had reported earnings per share of $2.72 in 2018.

The company is trying to counter the unfavorable impact of mega-beer decline with new business in growing categories. However, this change in new business mix is creating more operational complexity and higher costs, which is likely to impact Owens-Illinois’ results. Furthermore, commissioning new capacity for future growth has added more cost than originally projected.

Will the Stock Rebound?

Owens-Illinois is poised to benefit from focus on improving factory performance, cost reduction and innovations. In addition, the company is focused on investments in business. It intends to achieve this by investing in joint ventures and incremental capacity, and through bolt-on acquisitions in emerging geographies.

Owens-Illinois’ joint venture (JV) with Constellation Brands, Inc. STZ and long-term sales contracts in Mexico will likely mitigate the impact of the ongoing decline in mega beer in the United States.The JV has exceeded expectations so far — productivity has been higher than anticipated, capital costs were considerably lesser than initially expected and earnings have been growing every year. Owens-Illinois has built four furnaces at this JV in just four years and is currently building the fifth one which is expected to come on line by the end of 2019. The fifth furnace will help cater to the rising demand from Constellation’s adjacent brewery. With the installation of the latest furnace, the Nava plant will be the largest, most modern glass-container factory globally.
 
Glass packaging in Western Europe has been growing for the last two years. The company’s efforts to add capacity in Europe, boost supply-chain performance, focus on growing strategic relationships and footprint optimization poise it well for improving volumes and expanding margins in the region.
 
In the United States, demand for glass is growing, propelled by favorable consumer trends and increased preference of customers for glass packaging. Demand for non-beer customer continues to grow in the nation. Thus, the company is converting almost 20% of its beer capacity into flexible capacity to meet demand for non-beer categories. In the Asia Pacific, benefits from the asset advancement program and growing demand in emerging markets will drive volumes, while efforts to lower structural costs will expand margins.
 
Owens-Illinois has acquired 49.7% interest in Empresas Comegua S.A. The buyout will help the company expand its presence into new and growing glass markets in Central America, as well as fortify market presence in the Caribbean. In July, the company acquired Nueva Fanal in Mexico, which has the capacity to produce and supply approximately 300,000 tons of glass containers annually for Grupo Modelo brands, such as Corona serving the local and global export markets. It is anticipated to contribute roughly $140 million of revenues and $40 million of EBITDA on an annual basis. The Nueva Fanal buyout, along with the previous acquisition of Vitro's food and beverage business, solidifies Owens-Illinois’ position in the attractive and growing glass segment of the packaging market in Mexico.

We believe these factors will eventually benefit Owens-Illinois’ results and help drive a recovery in its share price.

Zacks Rank & Stocks to Consider

Owens-Illinois currently carries a Zacks Rank #4 (Sell)

A few better-ranked stocks in the Industrial Products sector are Albany International Corp. AIN and AGCO Corp. AGCO, each carrying a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Albany International has an estimated earnings growth rate of 33.85% for 2019. The company’s shares have surged 44.6% year to date.

AGCO Corp. has a projected earnings growth rate of 11.2% for the current year. The stock has gained 35.7% so far this year.

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