Ball (BLL): Riding the growth of craft brewers

By Tyler Laundon, Chief Analyst, Cabot Small-Cap Confidential
From Cabot Wealth Advisory 11/16/15 Sign up for Cabot Wealth Advisory—it’s free!

There are basically three can manufacturers that supply small U.S. craft brewers, and it’s estimated that between 2011 and 2014 craft beer volume in cans increased from just 2% to 10%. I don’t know if that growth came purely at the expense of bottled beer, but I suspect with the number of breweries soaring, there was some incremental growth.

With only three can manufacturers out there, they have a defensible market position. In fact, the Brewers Association reported that one of them, Crown Holdings (CCK), recently dropped new and existing customers using 12 oz and/or 16 oz cans. The company is also reported to have pushed out wait times to as long as 18 months. That’s a fairly dramatic step for the second largest supplier by market cap; Pennsylvania-based Crown Holdings has a market cap of $7.3 billion.

I haven’t dug deep enough to uncover the source of Crown’s logic, but perhaps the reason lies in the pending merger of its two competitors, Ball (BLL) and Rexam (REXMY).

Ball is based in Colorado, has a market cap of $9.2 billion, and pays a 0.8% dividend, while Rexam is based in the U.K., has a market cap $5.9 billion, and pays a 2.2% dividend. Earlier in 2015, Ball extended a $6.8 billion offer to acquire Rexam in a deal that would combine the world’s two largest beverage can makers by volume.

None of these three packing companies are growing rapidly, but the beverage industry enjoys steady demand, so over the long-term, investors have tended to do well. Ball, Rexam and Crown are up 110%, 76% and 54%, respectively, over the last five years, compared to a 69% gain in the S&P 500.

I like Ball the best, probably because I see its logo every time I have a 16 oz can of Heady Topper or Sip of Sunshine. And I also tend to use Ball jars as water glasses (the screw-on lids are a nice feature when you need to run out and want a drink handy). The company only grew sales by 12.3% between 2010 and the end of 2014, but EPS growth of 64% was decent. And if it can close the Rexam deal, there should be significant scale and efficiency gains that would increase the value of the company over time.

That said, it’s probably best to watch these stocks until there’s greater clarity on the M&A front. European Union antitrust regulators will make the go or no-go call on the Ball-Rexam deal by December 23, and it’s reasonable to expect that they’ll consider the proposed Anheuser-Busch InBev-SABMiller deal, as well as possible divestiture of certain of Ball’s assets, probably to Crown Holdings.

Once the chips fall, I expect steady demand for cans and (hopefully) greater cost efficiencies will keep Ball rolling. If it can deliver another 110% return over the next five years, then that would be something to raise a pint to.

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Company Details

Ball Corporation (BLL)
10 Longs Peak Drive
PO Box 5000
Broomfield, Colorado 80021
Index Membership: N/A
Sector: Consumer Goods
Industry: Packaging & Containers
Full Time Employees: 14,500