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BLL AT A GLANCE

P/E ► 13.9 AVG EV/EBITDA ► 11.0 AVG ROA ► 7% AVG ROE ► 23.6% AVG Debt to Equity ► 3.60 AVG Current Ratio ► 1.72 AVG Interest Coverage Ratio ► 4.34 AVG

 

 

 

 

 

 

Ball Corporation (NYSE: BLL) is a manufacturer of metal and plastic packaging for beverages and foods.^[1] Most of Ball Corporation's customers are breweries and soft drink bottlers, which pay Ball to make aluminum soft drink and beer cans.^[2] The company sells 18 different beverage can sizes and helps its customers develop their own specialty cans^[3] - an example is a narrower 8.4oz can for Molson Cold Shots, which are currently sold in Canada.^[4]

Ball has captured 31% of the market for metal beverage cans in North America.^[5] It competes with companies like Amcor (AMCR), Rexam (REXMY), Crown Cork & Seal Company (CCK), and Silgan Holdings (SLGN) in the packaging and container market.^[6] Despite strong competition, Ball maintains a stable market position as contracts rarely change hands in the packaging and container industry. Because of this, Ball's revenues and operating income are often controlled by external factors such as the demand for packaged beverages like soft drinks and beer.^[7] The cost of raw materials such as aluminum also tends to effect Ball's operating income despite clauses in their contracts that allow them to pass increases in raw material cost on to the customer because the increase in the cost of Ball's finished product can result in lower sales.^[8]

Business

Ball sells its packaging products directly to a few major companies in the packaged food and beverage business, such as SABMiller plc (SBMRY), Pepsico (PEP), and the bottlers of Pepsi-Cola and Coca-Cola.^[9]

Segments

Metal Beverage Packaging, Americas

The Metal Beverage Packaging, Americas segment consists of operations located in the U.S., Canada, and Puerto Rico, which manufacture aluminum cans and can ends used to package beverages such as soda and beer. In 2007, Ball produced 33 billion aluminum cans, 31% of the total market.^[11] Ball sells its aluminum cans to companies like Molson Coors Brewing Company (TAP), SABMiller plc (SBMRY), Pepsico (PEP), and the bottlers of Pepsi and Coca-Cola.^[12]

Metal Beverage Packaging, Europe/Asia

The Metal Beverage Packaging, Europe/Asia segment comprises the company's European, Asian, and Brazilian operations, which manufacture aluminum and steel cans and can ends used to package beverages such as soda and beer. In 2007, Ball produced about 14.5 billion (29%) of Europe's 50 billion metal beverage cans. The European market for metal beverage cans continues to grow (it grew by 30% in Poland alone from 2006 to 2007) providing an opportunity for Ball to increase its revenues. In China, Ball manufactured 2.4 billion (22%) of China's metal beverage cans and another 1.4 billon (13%) were produced by Ball's joint ventures.^[13]

Metal Food & Household Products Packaging, Americas

The Metal Food & Household Products Packaging, Americas segment consists of operations located in the U.S. and Canada, which manufacture steel containers used primarily in food and aerosol packaging. Ball's steel food containers are mostly three piece steel cans that are used for vegetables, fruit, soups, meat, seafood, nutritional products, pet food and other products. In 2007, Ball produced 5.6 billon (18%) of the steel food containers sold in the U.S. and Canada. Ball also produced 1.6 billion (51%) of the steel aerosol cans sold in the U.S. and Canada.^[14]

Aerospace and Technologies

The Aerospace and Technologies segment includes defense systems, civil space systems, and commercial space operations.^[15] In 2007, Ball's Aerospace and Technologies segment won several contracts with the U.S. government including a $6.5 million contract to operate the Infrared Radiation Effects Laboratory (IRREL) at the Air Force Research Laboratory and a $10 million contract to develop instrumentation for U.S. Navy airplanes.^[16] Ball also signed a deal to build DigitalGlobe's third satellite to take high resolution pictures of Earth.^[17] In February of 2008, Ball Aerospace won a $42 million contract to do research on lasers for the Air Force.^[18]

Plastic Packaging, Americas

The Plastic Packaging, Americas segment consists of operations located in the U.S., which manufacture polyethylene terephthalate (PET) and polypropylene plastic container products used mainly in beverage packaging. In 2007, Ball produced 6 billion (9%) of the PET plastic bottles sold in the U.S.^[19]

Financials

Ball Corporation Revenue and Operating Income^[20] ($ in millions)

Despite a revenue increase of nearly 12% from 2007 to 2006, Ball's operating income decreased by about 12% from $581.3 million in 2006 to $513.9 million in 2007. This is mainly due to an $85.6 million dollar legal settlement with SABMiller plc (SBMRY) The use of revenues from the Metal Food & Household Products Packaging, Americas segment and Plastic Packaging, Americas segment for mergers and acquisitions also contributed to the decrease in operating income.^[21]

Key Trends and Forces

Changes in the production capacity of the metal beverage container industry:

Currently, there is excess production capacity in the metal beverage packaging industry in the Americas as manufacturers have increased supply capacity faster than beverage companies have grown their output. If the industry doesn't decrease capacity quickly enough, Ball will be forced to lower prices or lose customers to other firms. On the other hand, if Ball and its competitors decrease production capacity until there is a shortage of metal beverage containers, Ball will be able to negotiate contracts with higher prices.^[22]

The loss of any one customer would negatively affect Ball's profitability:

Because a few key customers are responsible for almost all of Ball's sales, the loss of any one customer will have a negative effect on Ball's profits. For example, orders from the bottlers of Pepsi and Coca-Cola make up 28% of Ball's revenues.^[23] Therefore, if one or more of these bottlers decided not to renew their contracts with Ball, Ball could lose up to 80% of its revenues. Ball combats this risk to a certain extent by negotiating long term contracts, but the contracts include clauses to let customers cancel orders if Ball doesn't satisfy quality or volume requirements.^[24]

Changes in the price of raw materials:

The price of Aluminum is affected by several factors including demand from other industries (transportation, construction, etc.) and aluminum manufacturing costs. Changes in the price of commodities such as Aluminum on the London Metal Exchange affect Ball's profitability. For example, if the cost of aluminum rises, the cost of each aluminum can Ball produces will increase. Ball protects against this risk by negotiating contracts that let Ball pass increases in the cost of raw materials on to customers. However, if raw material prices rise over a long enough period of time, Ball's sales volume may decrease as customers try to cut costs.^[25] Furthermore, there is a small lag period between the price increase and the adjustment of the contract, and during this period Ball's margins suffer. However, Ball's passthrough agreements usually protect short run profits. ^[26]

Fluctuations in Exchange Rates affect Ball's U.S. Dollar revenues:

Because most of Ball's foreign contracts are negotiated in the common currency of that country, changes in the dollar value of world currencies dollar affects Ball's revenues. If foreign currencies depreciate, the dollar value of Ball's international revenues will decrease. On the other hand, if the dollar value decreases (foreign currencies appreciates), the dollar value of Ball's international revenues will increase. As Ball continues to grow their metal Beverage Packaging, Europe/Asia segment, they will become more and more exposed to exchange rate fluctuations.^[27]

Changes in consumer demand for beverage and food items:

The demand for almost all of Ball's products (except those manufactured by their Aerospace and Technologies segment) depends on sales of the beverages and food items they are made to hold. Demand for food and beverage items can change seasonally. For example, sales of Ball's metal beverage containers tend to be highest from April to September during the hot Summer months.^[28] Demand can also change in long term trends. For example, customer preferences can shift from one brand of soft drink or beer to another or from soft drinks and beer to alternatives such as bottled water and hard liquor. For example, if consumers start buying less Bud Light and more Miller Light, Ball's revenues will increase as SABMiller plc (SBMRY) orders more beer cans to package the extra beer. On the other hand, if consumers start buying less Miller Light and more hard liquor, Ball's revenues will decrease as SABMiller plc (SBMRY) orders less beer cans to compensate for decreased production of their beer.

Key Competitors

Ball competes with other packaging manufacturers and with food and beverage companies than make their own packaging such as Anheuser-Busch Companies (BUD). Ball's biggest competitors are:

• Amcor (AMCR)-An Australian company that produces PET bottles, steel and aluminium food and beverage cans, containers for household products, and a variety of other packaging products. Amcor will be one of the main companies Ball competes with as it expands it's international operations.^[29][30]
• Rexam (REXMY)-A U.K. based company that produces cans and containers for the beverage, beauty, pharmaceuticals and food industries. Rexam is the world's largest beverage can manufacturer and one of Ball's main competitors internationally and in the Americas.^[31][32]
• Crown Cork & Seal Company (CCK)-A U.S. based company that manufactures aluminum and steel cans for the soft drink, food, citrus, brewing, household products, and personal care industries. Crown Cork & Seal Company is one of Ball's main domestic competitors.^[33][34]
• Silgan Holdings (SLGN)-A U.S. based company that manufactures aluminum and steel cans for human and pet food; plastic containers for food, consumer products, and pharmaceuticals; and vacuum closures for food and beverage products. They compete with Ball's Metal Food & Household Products Packaging and Plastic Packaging segments.^[35][36]

Ball Corporation and Key Competitors 2006^[37](U.S. $ in Millions)

Notes

1. ↑ BLL 2007 10-K, Item 1: Business, page 1
2. ↑ BLL 2007 10-K, Item: 8 Notes to Consolidated Financial Statements, page 47
3. ↑ BLL 2007 Letter to Shareholders, page 3
4. ↑ Molson Cold Shots Packaged in New Eye-Catching Can From Ball
5. ↑ BLL 2007 10-K, Item 1: Metal Beverage Packaging, Americas, Segment, page 3
6. ↑ Google Finance: BLL Related Companies
7. ↑ BLL 2007 10-K Item 1A: Risk Factors, page 11
8. ↑ BLL 2007 10-K Item 1A: Risk Factors, page 11
9. ↑ BLL 2007 10-K, Item: 8 Notes to Consolidated Financial Statements, page 47
10. ↑ BLL 2007 Letter to Shareholders, page 6
11. ↑ BLL 2007 10-K, Item 1: Metal Beverage Packaging, Americas, Segment, page 3
12. ↑ BLL 2007 10-K Item 1A: Risk Factors, page 9
13. ↑ BLL 2007 10-K, Item 1: Metal Beverage Packaging, Europe/Asia, pages 4-5
14. ↑ BLL 2007 10-K, Item 1: Metal Food & Household Products Packaging, Americas, pages 5-6
15. ↑ BLL 2007 10-K Item 1: Aerospace and Technologies, page 7
16. ↑ BLL Key Developments, page 2
17. ↑ BLL 2007 Letter to Shareholders, page 8
18. ↑ Ball Unit Wins $42M Air Force Deal
19. ↑ BLL 2007 10-K Item 1: Plastic Packaging, Americas, page 6
20. ↑ BLL 2007 10-K Item 8: Notes to Consolidated Financial Statements, page 48
21. ↑ BLL 2007 10-K Item 8: Notes to Consolidated Financial Statements, page 48
22. ↑ BLL 2007 10-K, Item 1: Metal Beverage Packaging, Americas, Segment, page 3
23. ↑ BLL 2007 10-K, Item 8: Notes to Consolidated Financial Statements, page 47
24. ↑ BLL 2007 10-K Item 1A: Risk Factors, page 9
25. ↑ BLL 2007 10-K Item 1A: Risk Factors, page 11
26. ↑ BLL 2007 10-K Item 1A: Risk Factors, page 11
27. ↑ BLL 2007 10-K Item 1A: Risk Factors, page 10
28. ↑ BLL 2007 10-K, Item 1: Metal Beverage Packaging, Americas, Segment, page 3
29. ↑ Google Finance AMCR
30. ↑ AMCR 2006 20-F Item 4B: Business Overview, page 16
31. ↑ Google Finance: REXMY
32. ↑ REXMY 2007 Annual Report: Rexam at a Glance
33. ↑ Google Fincance: CCK
34. ↑ CCK 2007 10-K
35. ↑ Google Finance: SLGN
36. ↑ SLGN 2007 10-K Item 1: Business Overview
37. ↑ All information taken from respective wikinvest pages