Expanded Capacity And Tactical Repurchases Set Stage For Growth Amid Challenges

Key Takeaways

• The acquisition of Alucan Entec expands Ball's capacity in Europe, driving future revenue growth and customer base diversification.
  
• Operational efficiencies and cost management are set to improve net margins, boosting earnings despite macroeconomic challenges.
  
• Economic and demand challenges in North and South America, along with market weaknesses, could negatively impact revenue, net margins, and earnings stability.

Catalysts

Supplies aluminum packaging products for the beverage, personal care, and household products industries in the United States, Brazil, and internationally.

• The acquisition of Alucan Entec is poised to expand Ball's capacity in the growing market for extruded aluminum aerosols and beverage bottles in Europe, potentially driving future revenue growth and diversifying the customer base.
  
• Improving operational efficiencies and plant efficiencies, especially in North America, are expected to better position Ball for enhanced net margins when consumer demand increases, leading to more profitable services to customers.
  
• Strong operational performance in Europe, and favorable demand trends are on track to boost comparable operating earnings, indicative of improved operational efficiencies and volume growth in the region, potentially impacting earnings positively.
  
• Continued share repurchases, anticipated to be in excess of $1.6 billion for the year, are intended to drive significant growth in earnings per share (EPS), reinforcing shareholder value.
  
• Focused on cost management and maximizing operational excellence could result in sustaining or improving net margins despite the current macroeconomic challenges, setting a strong foundation for long-term earnings growth.

Ball Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Ball's revenue will decrease by -0.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $3.96) by about November 2027, up from $752.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.3x on those 2027 earnings, down from 23.8x today. This future PE is lower than the current PE for the US Packaging industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 1.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.24%, as per the Simply Wall St company report.

Ball Future Earnings Per Share Growth

Risks

• Economic pressures on the end consumer in North America, primarily due to inflation and reduced discretionary spending, could continue to impact sales volumes negatively, affecting revenue.
  
• Softer-than-anticipated volume performance in South America, driven by economic issues in Argentina and demand tightness in Brazil, poses a risk to regional revenue growth.
  
• Persistent challenges in the U.S. domestic beer market add uncertainty to volume recovery in North America, potentially impacting revenue and earnings.
  
• Weakness in the aluminum cups business, leading to potential evaluations of various options for this segment, suggests underperformance that could affect net margins.
  
• Volatility in emerging markets, notably in regions like Argentina with recent economic instability, presents risks that could impact overall earnings stability.

Valuation

• The analysts have a consensus price target of $70.25 for Ball based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $83.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $13.5 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 21.3x, assuming you use a discount rate of 6.2%.
• Given the current share price of $59.91, the analyst's price target of $70.25 is 14.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.