Ball Q2: Steady Global Beverage Can Volume Growth (NYSE: BALL)

We have initiated a “Buy” rating for Ball (NYSE: BALL) in February 2015, supporting the company’s long-term free cash flow growth and leadership in the beverage packaging market. Ball released its Q2 FY24 result on August 1^Stanticipating a $1.6 billion return to shareholders in FY24. I believe the company can continue to deliver double-digit EPS growth going forward. I reiterate a “Buy” rating with a one-year price target of $80 per share.

Solid overall beverage case volume growth

As reported during the earnings call, global shipments of extruded aluminum beverage and aerosol cans grew by 2.8% and 5.6%, respectively, in Q2 FY24. The solid volume growth is in line with the company’s long-term expectations, as detailed in the chart below.

I think there are several structural growth drivers for global beverage can sell:

• Due to the growing demand for sustainability and increased awareness about environmental protection, the beverage cans market is expected to grow at a CAGR of 5.3% from 2024 to 2032, according to Expert Market Research. Global beverage manufacturers have greater incentives to use aluminum packaging products, which can be recycled, to meet their sustainability goals.
• Global beverage companies such as Coca-Cola ( KO ) and PepsiCo ( PEP ) have seen low single-digit volume growth in recent years. The increase in beverage volume is directly related to the growth of the beverage packaging market.
• As shown in the chart below, the price of aluminum has fallen since the global pandemic. Lower aluminum prices benefit global beverage companies, encouraging them to adopt aluminum packaging.

Focus on shareholder return and EVA

As indicated in my introductory report, Ball focused on capital allocation, shareholder return, as well as economic value added (EVA). The EVA focus allows the company to prioritize shareholder returns and capital efficiency. To date, the company has already returned $925 million to shareholders through dividends and share buybacks. Management anticipates a return to shareholders of $1.6 billion in FY24, representing about 8% of the total market capitalization.

Over the past three years combined, the company has already returned $2.1 billion to shareholders, demonstrating a consistent approach to capital allocation. In addition, management has committed to reducing the company’s net debt leverage to below 2.5x by the end of the fiscal year. I anticipate that the company will follow its capital allocation policy in the future, thereby creating added value for shareholders.

Assessment and outlook

As illustrated in the chart below, Ball posted a 23.7% increase in adjusted operating profit despite a 3.5% drop in revenue in Q2. The negative revenue growth was driven by the pass-through of lower aluminum prices as well as lower volume in South America.

My biggest takeaway is the company’s strong focus on cost management. Over the past few years, Ball has re-adjusted its global supply chain system and optimized its back-office structures.

For growth in FY24, I consider the following:

• For global beverage dosage, I anticipate the market to grow by 3% in volumes, driven by the global push for sustainability.
• With commodity prices starting to decline in FY24, I expect prices to create a 2%-3% headwind to top line growth.
• On February 16, 2024, the company completed the divestment of its aerospace business. As management communicated, the company will use $2 billion to reduce debt and strengthen its balance sheet.

As such, we forecast Ball’s revenue to decline by 3.5% in FY24.

Starting at the FY25 growth rate, I model organic revenue growth of 5%, reflecting volume growth of 2%-3% and price growth of 2%-3%.

On the margin side, we estimate that the company will deliver 20bps of gross profit leverage expansion. The company has invested heavily in capital expenditures in recent years, totaling more than $4.4 billion in the past three years combined. The high level of CAPEX would lead to higher depreciation expense, which I estimate will create a 10bps headwind on margins.

DCF Summary:

I calculate free cash flow from equity as follows:

The cost of equity capital is estimated at 10%, assuming a risk-free rate of 3.8% ((US 10Y Treasury)); beta 1.07 (SA); equity risk premium 6%.

Discounting all FCFE, the one-year price target is calculated to be $80 per share.

Key risks

Ball has some business operations in Argentina, which is experiencing high inflation and weak economic growth. Outside of the earnings call, management expressed limited market visibility. I do not anticipate that the market will recover in the near future. As indicated by management, the Argentina market contributed to the 1% decline in volume for Ball. I would prefer to see the company divest its Argentina business in the future.

Final note

We have always viewed Ball as a stable, high-quality company suitable for investors focused on dividends or long-term income. Because I believe the stock is currently undervalued, I reiterate my “Buy” rating with a one-year price target of $80 per share.