OI – Protected from China, CEO Succession Could Shift Sentiment

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Graham Copley / Nick Lipinski



September 23rd, 2015

OI – Protected from China, CEO Succession Could Shift Sentiment

  • Owens-Illinois (OI) has a similar scale advantage and competitive positioning to the metal can makers, which we have previously noted appear insulated from Chinese competition
    • The glass bottle industry is similarly consolidated, regional, and capital intensive, and enjoys solid cash margins outside of the fragmented and oversupplied Chinese market
  • The stock has been dismissed by investors for over a year now for largely macro/currency issues but the story could change on sentiment alone with a new CEO scheduled to take over later in the year
    • The most recent comparison in the sector is Sealed Air (SEE), where shares outpaced the S&P by 60%+ in the two years after Jerome Peribere took over compared to 30% underperformance in the two years prior
    • Andres Lopez, presumptive successor at OI, has a reputation as a strong operator and enjoyed great success in driving OI’s South American business to industry best margins
    • There are great opportunities to improve productivity and ROC, as well as return cash to shareholders
  • Cash generation is not a problem
    • Forward FCF yield (8.5%) is near the top in Paper & Packaging and flows are stable
  • Relative and normalized valuation indicate the stock is cheap but not historically so
    • The discount in the name is greater than it has been at any time since mid-2004
    • Even if recent pressures continue, the stock should only have downside to the mid-teens
  • We are intrigued by the apparent disinterest in a globally scaled market share leader and the possibility that the management turnover could arouse interest in the stock
    • At the midpoint of its five year relative P/E range, OI should trade in the low $30s, with room to go higher if the incoming CEO can improve margins and follow through on the promise of initiating a dividend

Exhibit 1

Overview – Sentiment Shifts Can be Significant

The glass bottle industry enjoys many of the same characteristics that we recently noted protect the metal can industry from Chinese competition. Apart from the still-oversupplied and highly fragmented market in China itself, OI enjoys leading market shares in the highly consolidated, capital intensive, and regionally based glass container markets of North America, Europe, South America, and Oceania.

The negative sentiment toward OI over the past year (during which time the stock has declined by 40%) has been driven by macro pressures – mainstream beer in North America remains under pressure, Europe’s general malaise has been compounded by pricing pressures in the wine industry, Brazil has weakened significantly following the World Cup boom, and softness in Australia/New Zealand has not helped. The strengthening dollar has been a problem for OI, with 60% of its sales generated in Europe, and ~75% in total outside the US.

Even if the challenging macro environment persists, OI should only trade down to the mid-teens, at which point valuation would be very compelling – the stock is currently cheaper than it has been in a decade, but not quite at the lows seen during the tech bubble.

We are intrigued by the apparent disinterest in a globally scaled market share leader and the possibility that the management turnover could arouse interest in the stock. Shares of Sealed Air (SEE) for instance, woke from an extended slumber after Jerome Peribere was brought in to turn the company around. Again we note that, in the long term, OI is unlikely to face significant Chinese competition outside of China itself given the company’s scale from established assets in regional markets and the capital intensity of the industry.

Exhibit 2

Source: Capital IQ, SSR Analysis

Cash Generation Not a Problem

OI still ships a large volume of glass containers and its cash flows are not in question. FCF yield is among the best in the Paper & Packaging space – Exhibit 3. OI has rarely traded above this level over the past 10 years – Exhibit 4.

Exhibit 3

Source: Capital IQ, SSR Analysis

Exhibit 4

Source: Capital IQ, SSR Analysis

Valuation – A Cheap Stock, but Not Yet at the Historic Lows

OI is nearing one standard deviation cheap and its relative multiple is lower than it has been in a decade, but on these metrics is not at historical levels of discount. The stock was all but left for dead in the tech bubble, but rebounded nicely over the next decade.

Exhibit 5

Source: Capital IQ, SSR Analysis

Moving Forward – Increased Opportunities for Capital Return

The recent acquisition of Vitro’s Food & Beverage business gives OI an immediate presence in the strong and growing Mexican market, where the company previously had a very limited footprint.

The acquisition is expected to add $100 million of free cash flow, which should enable the initiation of a modest dividend within the next few years.

In recent years pension and asbestos payments have constrained OI’s ability to return capital to shareholders but 2015 was expected to be a turning point from a capital allocation standpoint, with share repurchase activity accelerating to accretive rather than simply anti-dilutive levels – Exhibit 6. This was even before the Vitro acquisition brought the prospect of $100 million of incremental cash flow. As shown in Exhibit 4, the stability of OI’s cash flows is not in question.

Exhibit 6

Source: Capital IQ, SSR Analysis


Brazil could see a boost in volumes related to the 2016 Olympics but a prolonged recession in one of OI’s only growth markets is a significant risk.

Assuming macro pressures persist, OI looks like it only has downside to the mid-teens.

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