A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that manufactures metal packaging for the beverage, food and consumer products industries while also owning an aerospace business.

Pat notes that a growing number of the firm’s customers are now switching from glass and plastic to aluminum for environmental reasons. Pat also suggests that the company’s fortunes have improved thanks to successful restructuring and cost control efforts. Still, the stock’s high p/e may pose a risk.

Q: Dear TSI team, can I have your analysis of Ball Corporation (NYSE BLL)? What are your views about the future of aluminum containers for beverages? Thanks!

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Ball Corporation, (symbol BLL on New York; www.ball.com), manufactures metal packaging for the beverage, food and consumer products industries. The company also has an aerospace business that designs and manufactures a variety of aerospace products for both government and commercial clients. Ball is headquartered in Broomfield, Colorado, has manufacturing facilities around the world, and employs more than 17,500 people.

The company’s packaging and container operations are responsible for 90% of total revenue, with the remaining 10% contributed by its aerospace business.

Ball has a long corporate history of producing food containers in a variety of styles and materials. Over the years the company has reduced its glass and plastic operations to focus solely on being the world’s largest manufacturer of aluminum cans and aerosol containers. Ball sells its products mainly to large multinational beverage, personal-care and household-products companies. They include The Coca-Cola Company, Anheuser-Busch InBev, Molson Coors and Unilever.

In June 2016, the company acquired Rexam, a multinational consumer packaging firm headquartered in London, U.K. It paid $8.4 billion. Rexam operated 55 plants in over 20 countries across Asia, Europe, North America and South America.

In July 2018, as part of Ball’s strategic shift to focus on aluminum, it sold its U.S. steel food and aerosol packaging business to Ball Metalpack. That former joint-venture company paid $600 million and transferred 49% interest in the firm to Ball.

The company installed 11 new aluminum can production lines and two extruded aluminum aerosol lines in 2018.

Inner Circle: Company benefits from increasing environmental awareness

Over the past five years, Ball’s total revenue has increased 34.9%, from $8.6 billion in 2014 to $11.6 billion in 2018. Earnings fell 40.2%, from $470 million ($1.65 per share) in 2014 to $281 million ($1.00 per share) in 2015. They dropped again in 2016 to $263 million ($0.82 per share). Earnings improved 15.2% in 2017, to $303 million ($0.85 per share), before rising another 49.8% in 2018, to $454 million ($1.29 per share). That big gain was mostly due to the company’s successful restructuring and cost control efforts.

In the quarter ended March 31, 2019, revenue remained unchanged at $2.8 billion from the previous year. The sale of the company’s steel container business, and its revenue contribution, offset an 8% increase in beverage-can volumes and a 4% increase in aerosol-can volumes. Excluding one-time items, earnings fell 7.2%, to $167 million ($0.49 per share) from $180 million ($0.50). That decline was partly due to higher prices for aluminum scrap.

As awareness about plastic pollution spreads, demand for metal packaging is growing as a sustainable alternative. Aluminum cans are infinitely recyclable, which means that they can be recycled without degradation or loss of material. Many beverage and personal care brands have already changed to using aluminum cans and this shift will continue as additional beverage categories, including still and sparkling waters, wine, coffee and other beverages, also make the move to aluminum cans.

Meanwhile, Ball’s aerospace business has a $4.9 billion backlog of potential sales that should proceed now that the company has completed the expansion of its Aerospace Manufacturing Center in Westminster, Colorado. Ball has also hired 900 new aerospace employees.

The company holds $603 million in cash. Its long-term debt of $6.7 billion is a reasonable 30% of its market cap.

With a growing number of its customers now switching from glass and plastic to aluminum, Ball remains well-positioned to meet this growing demand. South America, in particular, is a big growth market for the company. In that region, cans have become the preferred packaging material for beer, tea, energy and hard alcohol categories. In addition, Ball’s plant expansions in Paraguay remain on track, while its new facilities in Argentina and Chile are already contributing to growth.

The stock trades at 25.3 times the forecast 2019 earnings per share of $2.63. In April 2019, Ball increased its quarterly dividend 50%, to $0.15 per share from $0.10 per share. The stock now yields 0.9%.

Recommendation in Pat’s Inner Circle: Ball Corporation is a hold.