Acquisitions And Contract Renewals Will Boost Production Capacity

Key Takeaways

• Strategic acquisitions and contract renewals promise capacity expansion and earnings stability, enhancing long-term revenue predictability.
  
• Focus on operational improvements and regional growth strategies is set to boost profitability and support earnings expansion.
  
• Economic challenges in key markets and supply chain pressures could strain profit margins and impact Ball's revenue and earnings growth negatively.

Catalysts

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

• Ball Corporation is actively expanding its capacity with acquisitions like the Florida can manufacturing facility, which is expected to provide additional production capabilities without altering Capital Expenditure plans or affecting share repurchase targets, potentially improving future revenue growth.
  
• The company's strategic pivot toward long-term contract renewals with major partners, such as the extension through the decade with a significant client, suggests earnings stability and secured revenue streams.
  
• Ball is focused on operational improvements and productivity gains through initiatives like the Ball Business system, aimed at increasing net margins and overall profitability, as well as adapting quickly to market demands, enhancing earnings predictability.
  
• Regional growth strategies in areas like EMEA, driven by sustainability legislation favoring aluminum and recovery in South America, are poised to propel volume growth above long-term averages, likely supporting revenue and operating earnings expansion.
  
• The possible divestment or strategic partnership of the cups business offers the potential to deconsolidate a segment that has been less profitable, reducing operational drag on net margins and potentially bolstering net earnings.

Ball Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Ball compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Ball's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.6% today to 7.8% in 3 years time.
• The bearish analysts expect earnings to reach $950.0 million (and earnings per share of $3.47) by about April 2028, up from $424.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.0x on those 2028 earnings, down from 32.3x today. This future PE is lower than the current PE for the US Packaging industry at 20.8x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.64%, as per the Simply Wall St company report.

Ball Future Earnings Per Share Growth

Risks

• The economic challenges in Argentina and Brazil, as well as economic pressure on consumers in North America, raise concerns about potential adverse impacts on Ball's revenue growth.
  
• The volume growth in North America is uncertain and largely dependent on economic conditions and consumer behavior. If there is no volume growth, Ball's ability to hit EPS targets could be significantly challenged, impacting overall earnings.
  
• Ball’s dependence on pricing agreements with large customers and the competitive pricing pressure, especially amid capacity concerns in North America, could strain profit margins in the near future.
  
• The aluminum supply chain pressure, particularly relating to tariffs and the impact on Mexican shipments, could increase costs and impact net margins negatively if not efficiently mitigated.
  
• The acquisition strategies and new plant investments carry execution risks and may not yield the expected return on investment, potentially impacting future earnings projections if these new assets do not perform as expected.

Valuation

• The assumed bearish price target for Ball is $51.79, which represents one standard deviation below the consensus price target of $59.71. This valuation is based on what can be assumed as the expectations of Ball's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 $44.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $12.3 billion, earnings will come to $950.0 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 6.6%.
• Given the current share price of $48.5, the bearish analyst price target of $51.79 is 6.4% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• 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.