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Summary

• Owens-Illinois shares have dropped in excess of 30% YTD.
• Declining income volumes and forex headwinds are creating a challenging atmosphere for the organization more than the subsequent twelve months.
• The business just lately decided to targeted income movement on share buybacks alternatively of dividends.

Owens-Illinois (NYSE:OI) investors have endured a hard yr, with the inventory down over thirty% considering that the begin of the 12 months. When the company gave its third quarter earnings presentation on October 29, 2014, it additional warned of declining volumes and several headwinds going through the company by means of the relaxation of 2014 and into 2015. As a outcome of weak assistance the stock bought off in excess of 6%. Anytime a company performs this inadequately, it sparks my desire to uncover benefit in the company and understand why the drop has transpired and regardless of whether or not investors can benefit by taking a long-expression stake in a beaten-up firm.

Owens-Illinois is an sector major glass bottle company for wines, beers, spirits, and non-alcoholic drinks. The firm has contracts with some of the largest beverage businesses in the globe, like, PepsiCo (NYSE:PEP), Brown-Forman (NYSE:BF.A), Molson Coors (NYSE:Tap), Anheuser-Busch InBev (ABI-BE), SABMiller (SAB-GB), and Heineken (OTCQX:HEINY).

Third Quarter Final results

3 months ended Sept. thirty,

($ hundreds of thousands)

2014

2013

Y/Y % alter

-Europe

$ 709

$ 733

-three%

-North The united states

$ 517

$ 529

-2%

-South The us

$ 313

$ 282

11%

-Asia Pacific

$ 197

$ 236

-seventeen%

Internet Sales

$ 1,745

$ one,784

-two%

Value of Merchandise Sold

$ one,408

$ one,432

-2%

Gross Revenue

$ 337

$ 352

-four%

Operating Revenue

$ ninety one

$ 178

-forty nine%

Internet Earnings

$ 60

$ 130

-fifty four%

EPS (Diluted)

$ .37

$ .79

-53%

All locations, apart from for South The us, had declining product sales volumes for Owens-Illinois, with global quantity down three% in the course of the quarter. North American product sales ended up negatively impacted by declining desire from the main domestic beer manufacturers, but partially offset by increased industry share from craft beer income. In Europe, the firm sees broad-primarily based macro weak point as component of the purpose for flat need and forex headwinds negatively affected internet sales. Asia Pacific had a dramatic slow-down as Owens-Illinois shut a plant in China because of to weaker than anticipated demand from customers. Australia has observed a slowdown as nicely with wine exports slipping in current months. The lone brilliant place for the firm has been South The usa, the place income increased by 11% owing to improved productivity and the non-recurrence of downtime from the prior 12 months quarter, which saw a labor strike in Columbia. South America also posted the maximum working revenue margin with 19.5%. In overall, Owens-Illinois posted one more disappointing quarter.

Outlook

The company expects relatively flat sales volume in Europe and South The united states, a slight decline in quantity in North The united states, and one more double digit volume decrease in Asia Pacific in 4Q14. Modified earnings and cost-free income stream will also be negatively impacted by a strong US greenback. In total, the company expects 4Q14 adjusted earnings to be down $.05 to $.forty five - $.55 and cost-free funds movement to decline $30 million to $320 million for the full calendar year 2014 because of to forex headwinds.

Seeking out to 2015, the organization also revised down entire yr guidance simply because of a more powerful US greenback and higher pension bills. The organization established a 2015 EPS concentrate on of $3.fifty, but now the strengthening US greenback will negatively afflicted EPS by $.20 and improved pension costs to will negatively effect it by $.35. 2015 free of charge money flow is targeted to be $350-$400 million, with forex headwinds around $thirty-$50 million.

A bright place for the company is the new settlement with Constellation Manufacturers to provide glass for their growing beer company in Mexic minix neo x8 android tv box. This is a 50-50 partnership, in which Owens-Illinois will provide glass bottles for Constellation Makes including, Corona Gentle, Corona Added, Modelo Especial, Negro Modelo, and Pacifico. Owens-Illinois will at first commit $100 million and one more $one hundred seventy five million for plant growth at a afterwards date. After the expansion in comprehensive, supply from the plant will insert the equal of roughly 20 % of Owens-Illinois' current North The us manufacturing. The agreement is envisioned to include $.05 per share to earnings in 2016 and $.fifteen for every share once the agreements are entirely implemented.

Fundamentals

Owens-Illinois has had a rough 2014, but it still produces good money stream. The organization is on track to generate $320 million in free cash circulation in 2014, which presents it a seven% FCF yield. The inventory also has a average valuation with a P/E of 19.one and an EV/EBITDA of 6.4. Nevertheless, the business does have a large credit card debt burden of $three.five billion and financial debt/equity ratio of 1.ninety two. Management has managed a ninety/10 approach of committing 90% of income flow to spend off credit card debt and 10% to inventory buybacks. The board of directors lately approved a $five hundred million share repurchased system by way of 2017 and has minimal of $100 million dedicated in 2015. The conclude consequence of this decision will be possibly a change in the 90/ten policy to give benefit back to shareholders or just take on extra credit card debt to finance the buyback program.

A basic problem with Owens-Illinois is the absence of a dividend. When questioned throughout the 3Q14 convention phone if the organization would institute a dividend in the foreseeable future, the CEO mentioned,

"We come to feel assured that we will be capable to produce income to refund - to bring back again some of that cash to our shareholders to a greater extent that we have carried out in the past. And we have occur to the summary that at this position in time, the buybacks is the much more suitable medium to do this."

With a new $five hundred million share buyback acceptance in location and the company continuing to target on paying out down financial debt and liabilities, a dividend isn't most likely to occur anytime in the in close proximity to foreseeable future. Although the buyback plan has the capability to get rid of over 10% of all excellent shares, I think this cash would be considerably greater put in straight rewarding shareholders through a little $.fifty/share dividend. This would give the stock a two% produce and would only outcome in a dedication of $82.five million each year. In addition, the market would appear far a lot more favorably on an additional two% annual dividend generate than a buyback system that will not show meaningful final results for a long time.

Conclusion

Investors searching for deep value plays might consider even more research into Owens-Illinois, but I think there are considerably as well several organizations out there that have greater downside safety, bigger upside potential and reward investors with meaningful dividends to believe about establishing a situation listed here. Owens-Illinois is observing declining income volume, which will most likely keep on into 2015 and will not likely be a quick recovery. The powerful greenback seems like it will be listed here for at the very least the following 8-twelve months and it has previously proven its adverse consequences on the firm's bottom line. The business has a huge financial debt stress and as a consequence, the firm has fully commited the vast greater part of totally free money circulation to shell out this down. Even though this is a excellent long-time period technique, the business has no dividends in place to reward shareholders for hanging in there while the organization fixes its balance sheet. In my viewpoint, the lack of a dividend is a offer breaker at this level. I'd recommend any interested buyers be client and wait around to see if the stock falls underneath $20/share or wait around till the debt load just isn't so influential in management's decision producing process. The glass bottling industry is not a swift transferring machine, so possible buyers have the luxury or getting a wait around and see method.