Transcript Ball Corporation

Ticker Symbol: NYSE: BLL
Ball Corporation
Looking for new opportunities while
maximizing profits from current ones.
CFA Institute Research Challenge 2012 – 2013
University of Northern Colorado
Agenda
Investment & Company Overview
Why Buy?
Valuation
Financial Analysis
Investment Risks
CFA Institute Research Challenge
Investment Overview
Recommendation: BUY
Current Price: $45.16
Price Target: $54.15
Growth
Opportunities
+
Dividend: $0.38
Cost Reduction
=
20.7% Upside Potential
CFA Institute Research Challenge
Immunity
Company Overview
52-week Price Range
36.61 – 46.59
Trading Volume
860,000
Beta (3Yr)
0.97
•
Maximizing value in our existing businesses
Dividend Yield
0.90%
•
Shares Outstanding
153.9M
Expanding into new products and capabilities
Free Float
98%
•
Aligning ourselves with the right customers and
Market Cap.
6,842M
Price to Earnings
16.9
•
Broadening our geographic reach, and
Price to Book Value
5.5
•
Leveraging our know-how and technological
Debt to Equity
258%
Return on Equity
29.90%
Return on Capital
10.40%
United States
Foreign
38%
62%
CFA Institute Research Challenge
Company Objectives:
markets
expertise to provide a competitive advantage.
9%
17%
74%
Metal Beverage
Packaging
Metal Food & Household
Products Packaging
Aerospace &
Technologies
Why Buy?
Growth
Opportunities
•Innovation
•Geographic
Cost
Reduction
•Operations
•Capital
Immunity
•Industry
•Company
CFA Institute Research Challenge
Immunity - Industry Traits
•
•
•
•
Contracts rarely change hands
High capital industry
Beer cannot be sold in plastic
Bargaining Power
Many contracts are fixed
of Suppliers
3
Competitive
Intensity
4 Bargaining Power
of Customers
1
2
Threat of Substitute
Products
4 = Most favorable to Ball Corp.
1 = Least favorable
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Barriers to Entry
4
Source: Team Analysis
Immunity - Industry Traits
• Low volatility of Revenues
• Major costs are passed down to the consumer
40.0%
30.0%
20.0%
10.0%
Alloy Costs YoY
BLL Rev YoY
0.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F 2015F2016F
-10.0%
Industry Rev YoY
-20.0%
-30.0%
-40.0%
CFA Institute Research Challenge
Sources: IBIS World, Company Release, Team Estimates
Immunity - Company Specific
•
Least involvement in Europe when compared to benchmarks
•
50% of contacts in Aerospace and Technologies are fixed
Largest Market Share allows for:
•
the ability to locate plants near major customers
•
reduced costs through efficient processes
•
limited Bargaining Power of Suppliers
Ball
Rexam
Crown
Avg. Collection Period
47
53
59
A/R Turnover
7.80
7.00
6.30
Inventory Turnover
6.40
5.10
5.50
Source: Companies Releases
CFA Institute Research Challenge
Cost Reduction
As the U.S. metal packaging industry is in a decline and growth opportunities are
scarce, Ball focuses on cost reduction:
Consolidation of
underperforming
products:
Maximization of
shareholders’
value:
Plastic/glass
containers
Repurchasing
stock while
continuing to
issue more debt
12oz can plants
Focus on EVA
CFA Institute Research Challenge
Cost Reduction
After-tax Cost of Debt =
4.25%
Continue to Replace C/S
with Debt
Cost of Equity = 9.07%
WACC versus Capital Structure
3500
3000
2500
2000
1500
1000
500
0
10
9
8
7
6
5
4
3
2
1
0
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011
Shares Outstanding
Net Debt
WACC
Source: Bloomberg
CFA Institute Research Challenge
Cost Reduction
After-tax Hurdle Rate = ~9%, whereas WACC = ~6%
Economic Value Added (EVA)
3500
3000
Changes to Ball’s
Management
2500
2000
1500
1000
500
0
-500
2006
2007
2008
2009
2010
2011
2012
Source: Bloomberg
CFA Institute Research Challenge
Profit Maximization
When Ball struggles with cutting operating costs, it continues to increase
shareholders’ value through buying back shares:
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
12
10
8
6
4
2
0
EPS
CFA Institute Research Challenge
Operating Margin %
Sources: Company Release, Team Estimates
Growth Opportunities
Innovation
Expansion to
Emerging Markets
Canned beer is a
growing trend
CFA Institute Research Challenge
• Higher-margin Specialty Cans (Alumi-Tek)
• Light-weight, recycled aerosol cans (ReAl)
• Telescopes, and other Aerospace and Technologies
innovation
•Rapid growth of consumer spending
•Favorable operating conditions (lower tax, wages,
etc.)
Growth Opportunities – Specialty Cans
• Provide the company’s hurdle rate of 9% approx. 5 times faster than regular 12oz cans
• Includes cans with colored ends, Alumi-Tek bottles, and ‘Tall-Boy’ cans
Specialty Cans
Alumi-Tek
CFA Institute Research Challenge
Growth Opportunities – Specialty Cans
Billions
• Demand for specialty cans grew by 20% in 2012 due to increasing sales of
convenience stores
• 21.6% of Convenience Store sales in the U.S. consist of packaged beverages
Convenience Store Sales
$58
$56
$54
$52
$50
$48
$46
$44
$42
2006
2007
2008
2009
2010
2011
2012
Source: National Association of Convenience Stores
CFA Institute Research Challenge
Growth Opportunities – Emerging Markets
Brazil:
• GDP growth = 4%
• 75% of beer produced in cans
• Low competition
• Ball holds 18% of market share and expects to grow it to 25-30% over next few years
Consumer Spending as a % of World Total
CFA Institute Research Challenge
Source: JP Morgan Chase
Growth Opportunities – Emerging Markets
China:
• GDP growth = 9%
• Household spending is a major contributor to GDP
• Largest beer market in the world
• Ball holds 28% of market share
CFA Institute Research Challenge
Growth Opportunities – Canned Beer
• 30% of cans sold in the U.S. are used for beer
• Can production enjoys a material benefit from economies of scale
• Breweries are expected to outsource can production
How Americans Drink Beer?
Sources: Bloomberg, U.S. Beer Institute
CFA Institute Research Challenge
Valuation
DCF - Free Cash Flows to the Firm:
Relative Valuation – P/E Method:
• Dividend Payout Ratio is low and
inconsistent
• Considers EBIT Margins which are a key
factor in the industry
• Omits high CapEx for next year as a
result of plant closures/acquisitions
Even though our FCFF method was found to have low sensitivity, as Ball’s Free Float is
98%, we decided to give our P/E valuation a higher weight.
Weights
Weight
Price
WxP
20%
$
62.43
$ 12.49
80%
$
52.08
$ 41.66
Price Target
CFA Institute Research Challenge
$ 54.15
Valuation - FCFF
FCFF Components
$62.43
5-Year
Projected
Cash
Flows
Terminal
Value
Net Profit Margin: increase by 0.7% over the next 5 years:
• Lower taxes as a result of higher foreign sales
• Higher operating margins from increased sales of specialty
$14.35
cans and cheaper operations
Sales increase by 5.1% CAGR over next 5 years:
• Expansion to Emerging Markets
$68.52
• Higher specialty-can sales
• Higher sales of personal-care products in EM and U.S.
EPS increase by 13.6% CAGR over 5 years:
- Debt
($20.44)
• Continue to repurchase stock
CFA Institute Research Challenge
Valuation - FCFF
Terminal Value:
Revenue – 2% growth
Depreciation and
CapEx – 2% growth
(same as Revenue)
Continue to innovate
itself and look for new
products and markets
Depreciation is to
allocate costs of
assets which fuel
revenue growth.
Similar to U.S.
GDP growth
CapEx is to
replace fully
depreciated
assets (also 2%
growth).
Less than CAGR
over entire
business life
CFA Institute Research Challenge
Cost of debt (before
tax) will eventually
increase to ~7% and will
make WACC higher at
5.85%
2% less than
cost of equity
Similar to the
industry’s cost
of debt
Valuation – P/E
3-year Average P/E =
13.98
Market Relative =
0.94
Adj. Mkt. Relative =
1
Forward P/E = 15
15PE X $3.47EPS = $52.08
$50
18X
$45
16X
$40
14X
$35
12X
$30
10X
$25
$20
$15
$10
2009
2010
2011
2012
Source: Bloomberg
CFA Institute Research Challenge
Valuation – P/E
Why we adjusted Ball’s market relative:
• Ball will continue to outperform the market
Source: Capital IQ
CFA Institute Research Challenge
Valuation – P/E
Why we adjusted Ball’s market relative:
• Cyclicals trading cheaply vs. Defensives due to investors lack of
trust following 2008’s recession
Cyclicals PE/Defensives PE
Source: JP Morgan Chase
CFA Institute Research Challenge
Financial Analysis
Ball
Rexam
Crown
Industry
2012 2011 2010
2012 2011 2010
2012 2011 2010
3 Year Avg.
Current
1.33
1.25
1.67
0.90
1.60
1.60
1.30
1.10
1.10
1.70
Quick
0.69
0.59
0.73
0.50
1.00
0.70
0.70
0.60
0.60
1.57
Cash
0.50
0.50
0.40
0.20
0.50
0.50
0.20
0.20
0.20
0.23
LIQUIDITY
Ball
Rexam
Crown
Industry
2012 2011 2010
2012 2011 2010
2012 2011 2010
3 Year Avg.
Total Asset TO 1.10 1.20 1.10
0.80 0.80 0.80
1.00 0.33 1.20
0.90
ASSET
Fixed TO
3.90 4.00 4.00
3.30 3.00 2.80
4.80 5.10 5.10
2.67
AR TO
7.80 10.70 12.60
7.00 9.40 9.40
6.30 10.90 11.80
5.80
Inventory TO
6.40 6.60 6.40
5.10 5.50 5.60
5.50 6.40 6.50
5.87
Avg. Collection 46.50 34.10 29.00
52.60 38.90 38.70
58.50 33.50 31.00
63.03
Ball
DEBT
Debt/Equity
Rexam
2012
2011
2010
2.58x
2.28x
1.69x
LT Debt/Capital 61.70% 59.60% 60.40%
TIE
4.73
4.90
5.04
2012
Industry
2011
2010
3 Year Avg.
83.10% 79.60% 81.10%
17.61x
N/A
13.31x
43.07%
18.60% 42.80% 42.70%
85.10% 101.30% 80.80%
14.53%
CFA Institute Research Challenge
5.20
2010
Contracts with customers have
been proven manageable.
2012
5.00
2011
Crown
Small risk of bankruptcy
despite debt’s effect on quick
ratio.
4.00
3.90
4.10
4.30
5.10
High percentage of
debt in low-risk
projects maximizes
shareholder value.
Financial Analysis
Ball
PROFITABILITY
Rexam
Crown
2012 2011 2010
2012
2011
2010
2012
Gross Margin 18.0% 18.0% 17.4%
45.3%
46.2%
48.2%
17.2% 17.6% 17.9%
21.0%
EBIT Margin
9.2% 9.7% 10.0%
5.9%
6.4%
5.1%
7.4%
4.6%
5.7%
8.7%
Net Margin
4.9% 5.1% 6.1%
4.0%
7.9%
2.7%
6.3%
3.3%
4.1%
5.9%
ROA
6.8% 7.6% 7.0%
5.1%
5.2%
4.9%
7.4%
8.7%
8.1%
5.8%
ROC
10.4% 12.1% 10.9%
7.6%
7.6%
6.8%
13.8% 18.1% 16.8%
8.1%
ROE
29.9% 30.9% 33.9%
12.5%
13.0%
10.2%
309.6% N/A 147.7%
9.6%
$2.74 $2.69 $2.59
EPS
0.9%
Dividend Yield
£ 0.22 £ 0.43 £ 0.14
3.2%
2011
Industry
2010
3 Year Avg
$3.63 $1.86 $2.03
0
Ball
Rexam
Crown
Industry
S&P
2012 2011 2010
2012 2011 2010
2012 2011 2010
2012
3 Year Avg.
P/E
15.80 13.50 11.50 14.20 10.20 12.30
16.60 18.30 16.70
24.60
15.30
P/B
5.40 4.80 3.90
1.90 1.30 1.30
-24.50 -10.70 -54.10
2.40
2.20
P/CF
8.10 6.50 12.10
9.70 6.50 5.80
13.80 13.90 9.20
8.90
9.30
P/S
0.80 0.70 0.80
0.80 0.70 0.60
0.70
0.70
1.30
MARKET
SUSTAINABLE GROWTH
Ball
2012 2011 2010
Plowback Ratio
87.7% 89.7% 92.4%
ROE
29.9% 30.9% 33.9%
=
26.2% 27.7% 31.3%
CFA Institute Research Challenge
0.60
Return on investment
exceeds the industry
average.
0.70
The potential growth in
emerging markets signals
undervaluation.
Investment Risks
Impact
•
Significant
Moderate
•
•
Unionized
Employees
Loss of contracts
or customers
Lower demand for
cans in China
Minor
•
•
Ban on BPA
Additional struggle
for Europe
•
Shift to
Biodegradable
Plastic
•
Budget cuts to
Defense
•
Increase in freight
costs
Probability
Low
CFA Institute Research Challenge
Medium
High
Investment Risks
12000
Frequency
10000
Monte Carlo Simulation – Price Sensitivity to Revenue Growth
Sell
Hold
Buy
0.4%
2.8%
96.8%
8000
6000
4000
2000
CFA Institute Research Challenge
$110
$106
$102
$98
$94
$90
$86
$82
$78
$74
$70
$66
$62
$58
$54
$50
$46
$42
$38
0
Questions?
CFA Institute Research Challenge
2012 – 2013
University of Northern Colorado
Backup Slides
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
Income Statement
10-year Stock Performance
Industry Revenue versus Aluminum Prices
Beer Consumption & GDP
Plants in Emerging Markets
Ball Revenue Growth
Ball EPS Growth
WACC
Foreign Exposure & Tax
P/E Valuation
EVA Valuation
CFA Institute Research Challenge
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
Involvement in Foreign Markets
Revenue Regression
Energy Drinks Sales
McKinsey’s Graph
10-year Revenue CAGR
Beta Calculation
Operating Margins
Shares Out./Div. PO/Interest Expense
Energy Imports
Sustainability
Credit Rating
DuPont
2009
2010
2011
2012E
2013E
2014E
Total
Revenues
6710.40
7630.00
8630.90
8750.00
9129.93
9932.15
EBIT
625.40
753.60
867.20
831.41
955.46
1089.08
1034.41
1062.32
9.3%
9.9%
10.1%
9.5%
10.5%
11%
10%
10%
387.90
468.00
444.00
427.16
534.21
649.96
610.56
623.47
Basic EPS
2.07
2.59
2.69
2.72
3.47
4.31
4.26
4.53
Dividends
per Share
0.20
0.20
0.28
0.38
0.38
0.30
0.38
0.45
EBIT
Margin
Net
Income
CFA Institute Research Challenge
2015E
2016E
10380.29 10660.32
Source: Morningstar
CFA Institute Research Challenge
Industry Revenue versus Aluminum Prices
21
3
20
3
20
2
19
19
2
18
1
18
1
17
17
0
Revenue (industry)
Source: IBIS World
CFA Institute Research Challenge
Aluminum Price
U.S. Beer Consumption versus GDP
25
16
15.5
20
15
14.5
15
14
13.5
10
13
12.5
5
12
Beer Consumption (31gal. barrels)
6/1/12
2/1/12
GDP (Trillion USD)
Sources: U.S. Bureau of Economic Analysis (BEA), The Beer Institute.
CFA Institute Research Challenge
10/1/11
6/1/11
2/1/11
10/1/10
6/1/10
2/1/10
10/1/09
6/1/09
2/1/09
10/1/08
6/1/08
2/1/08
10/1/07
6/1/07
2/1/07
10/1/06
6/1/06
11.5
2/1/06
0
Production Plants in Emerging Markets
10
9
8
7
Ball
6
5
Crown
4
Rexam
3
2
1
0
China
Other Asia
Brazil
Source: Companies Releases
CFA Institute Research Challenge
South America
BLL’s Revenue Growth
25000
20000
15000
10000
5000
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
GDP
Revenue Industry
Revenue Ball
Sources: IBIS World, Company Release, Team Estimates
CFA Institute Research Challenge
Earnings Per Share
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2009
2010
CFA Institute Research Challenge
2011
2012E
2013E
2014E
2015E
2016E
Ball Corp. WACC
Ball Corp.
3-Yr Beta
Proportion of Debt
Proportion of Equity
Tax Rate
Shares Outstanding
Market
Risk Free (10-Yr Note)
SP500 Return
1.73%
9.3%
Required Return
Cost of Debt
WACC
9.07%
5.90%
5.72%
CFA Institute Research Challenge
0.97
69%
31%
28%
153.9
Foreign Exposure and Tax Rate
60%
40%
35%
50%
30%
40%
25%
30%
20%
15%
20%
10%
10%
5%
0%
0%
2002
2003
2004
2005
% Foreign Assets
Source: Company Release
CFA Institute Research Challenge
2006
2007
2008
2009
2010
Effective Tax Rate
2011
P/E Valuation
S &P
Current P/E
3 Year P/E Average
15
14.81
BLL
3 Year P/E Average
Estimated EPS
M arket Relative
Adjusted Relative
P/E Estimate
Relative Value
13.98
3.47
0.94
1
15
$52.08
Sources: Bloomberg, Team Analysis
CFA Institute Research Challenge
Ball Corp. EVA Valuation
Base
EBIT (1-t)
$647
- WACC (CI)
EVA
Terminal EVA
PV
PV of EVA
$6,084
+ Capital Invested
$4,523
+ PV of Chg Capital in Yr 10 $2,319
= Firm Value
$12,926
Price Target
83.99
WACC
ROC
Capital Invested
Calculation of Capital Invested
Initial
$4,523
+ Net Cap Ex
+ Chg in WC
Ending
$4,523
Cumulated WACC
1
$573
$247
$326
2
$678
$253
$425
3
$825
$261
$564
4
$724
$273
$451
$309
$382
$481
5.47% 5.41%
12.67% 14.51%
$4,523 $4,673
$4,523
$138
$12
$4,673
$4,673
$139
$38
$4,850
$765
$280
$485
6
$770
$296
$473
7
$773
$313
$460
8
$774
$330
$444
9
$775
$348
$427
$365
$373
$345
$318
$291
$264
5.39%
17.01%
$4,850
5.36%
14.24%
$5,081
5.31%
14.49%
$5,283
5.42%
14.06%
$5,473
5.52%
13.64%
$5,667
5.63%
13.21%
$5,863
5.74%
12.78%
$6,063
$4,850
$151
$80
$5,081
$5,081
$158
$45
$5,283
$5,283
$162
$28
$5,473
$5,473
$166
$27
$5,667
$5,667
$170
$26
$5,863
$5,863
$174
$26
$6,063
$6,063
$178
$25
$6,265
105.47% 111.18% 117.17% 123.45%
CFA Institute Research Challenge
5
10
Terminal Ye
$774
$789
$366
$610
$407
$179
$4,645
$2,955
5.85% 5.85%
12.35% 7.56%
$6,265 $10,435
$6,265
$181
$23
$6,469
130.01% 137.05% 144.61% 152.76% 161.52% 170.97%
Ball Corporation’s Increase in Foreign Exposure
100%
90%
80%
70%
60%
50%
% Foreign Assets
40%
% Foreign Revenues
30%
20%
10%
0%
Source: Company Release
CFA Institute Research Challenge
2012F
2013F
2014F
2015F
2016F
BLL's YoY Growth
-0.53%
0.04%
-0.67%
4.88%
1.44%
-5.23%
1.80%
5.76%
9.30%
5.72%
15.15%
11.60%
2.33%
-2.87%
3.88%
13.12%
Coefficient
1.06
Significance F
5.65%
Industry YoY
Expected Growth
BLL's YoY Expected
Growth
-4.57%
2.78%
2.61%
3.12%
-3.46%
1.43%
9.22%
9.04%
9.58%
2.61%
CAGR Challenge
CFA Institute Research
5.02%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-10.00% -5.00%
-2.00%0.00%
-4.00%Ind. G
Ball YoY Growth
Predicted Ball
YoY Growth
Ball G
2004
2005
2006
2007
2008
2009
2010
2011
Industry YoY Growth
Linear
(Predicted Ball
YoY Growth)
5.00% 10.00%
Energy Drinks Sales
CFA Institute Research Challenge
CFA Institute Research Challenge
Revenues CAGR - 10 Years
35%
30%
25%
20%
15%
Rev. Growth YoY
10%
CAGR @ 6%
5%
0%
-5%
2003 2004 2005 2006 2007 2008 2009 2010
2011
2012
-10%
-15%
Source: Company Release
CFA Institute Research Challenge
Bloomberg Beta Calculation
CFA Institute Research Challenge
Ball Corp. - Operating Margins
12000
12.00%
10000
10.00%
8000
8.00%
6000
6.00%
Operating Inc
Revenue
Operating Margin
4.00%
2000
2.00%
0
0.00%
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
4000
Source: Company Release
CFA Institute Research Challenge
250
40%
30%
200
20%
150
10%
Chg Rev YoY
Interest Expense
0%
100
Shares Out.
Chg PO Ratio
-10%
50
-20%
0
-30%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Company Release
CFA Institute Research Challenge
Source: JP Morgan Chase
CFA Institute Research Challenge
Sustainability
Corporate Governance Disclosure Score: 62.5
Community Spending reached $6.5 million in 2011 (1.5% of Net Income)
Source: Bloomberg
CFA Institute Research Challenge
Sustainability - Recent
• David Hoover, chairman and former CEO of Ball Corp., and his wife donated $25
million to Indiana's DePauw University
• Ball’s employees raised nearly $1 million for United Way
• Audited energy usage and implemented a centralized compressor control in its
plants to save on energy being wasted from air compressors
• Ball Foundation – “The Ball Foundation’s mission is to provide financial support to
not-for-profit organizations that sustain the communities in which we live and
operate by improving and promoting education, recycling and community
engagement.”
CFA Institute Research Challenge
CFA Institute Research Challenge
Source: Company Website
Source: Company Website
CFA Institute Research Challenge
Credit Ratings
Source: Bloomberg
CFA Institute Research Challenge
Financial Analysis - DuPont
DUPONT ANALYSIS
(in millions)
2012
2011
2010
Sales
$8,673
$8,631
$7,630
EBIT
$853
$867
$754
EBT
$684
$700
$719
Net Income
$420
$444
$468
Assets
$7,524
$7,284
$6,928
Equity
$1,470
$1,378
$1,658
ROE =
Tax Burden X Interest Burden X Margin X Turnover X Leverage
↓
PreTax Profit
Net Profit
ROE =
PreTax Profit
X
EBIT
EBIT
X
Sales
Sales
X
Assets
Assets
X
Equity
↓
2012
61.44%
2011
63.41%
2010
65.08%
ROE =
CFA Institute Research Challenge
X
80.21%
9.83%
1.2
80.74%
X 10.05% X
1.2
95.42%
9.88%
1.1
28.5967%
32.2206%
5.1
X
5.3
4.2
28.2251%