CCK: Crown Holdings a Jewel
This article is a reprint of my 7 August 2008 RealMoney column.
Crown Holdings CCK - Annual Report) looks to me like the type of boring stock Peter Lynch would love. The company’s primary products include steel and aluminum cans for food, beverage, household and other consumer products and metal caps and closures.
Cans and bottle caps certainly don’t sound particularly glamorous. A glance at the recent producer price index report, however, shows that this industry has been steadily gaining pricing power over the last several years.
| Year/Year Change in PPI Index for Fruit and Vegetable Canning Industry |
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| Click here for larger image. |
| Source: Bureau of Labor Statistics |
You may be surprised by how much innovation actually occurs in the business. The company highlights its research and development activities, including the SuperEnd beverage can end, which requires less metal than existing ends without any reduction in strength, and value-added shaped beverage, food and aerosol cans, such as Heineken’s keg can. Innovative products and strong industry pricing showed through when the company reported second-quarter earnings on July 17. Analysts were expecting the company to earn 55 cents per share. The actual earnings came in at 61 cents because of both higher volumes and stronger pricing. A particular strong area was the company’s European operations.
Growth in a Plain Metal Can
Wachovia Capital Markets analyst Ghansham Panjabi said second-quarter results reflect “torrid growth” in Crown’s European beverage can business. I suspect that if you asked 100 investors at random to describe Crown’s business, “torrid” would not be a common response. Of course, that is the point. Everyone knows that Apple (AAPL) , for example, is experiencing torrid growth. And they are paying up for it. With Crown, you find strong momentum while the stock is still flying under the radar of most investors.
The company is expecting more of the same. As recently as April, the company expected segment income of $750 million to $780 million. It now expects $800 million to $820 million for the full year. Analysts raised their earnings per share estimates to $1.68 this year and $1.98 next year, up from the prior levels of $1.61 and 1.93, respectively.
A Further Indicator
Better still, this year’s earnings-per-share growth is hampered by a higher tax rate stemming from the reversal of a deferred tax valuation allowance late last year. Companies must take such an allowance when it is “more likely than not” that future net income will be insufficient to use deferred tax credits before they expire. Reversing such an allowance is a signal that management expects future profits to be better than previously thought. Further, until the tax rate is normalized the underlying earnings growth is understated. On an apples-to-apples tax basis, earnings per share would have grown 36% in the first six months of 2008 — twice the reported growth rate. The company also increased its free cash flow guidance, even after boosting planned capital expenditures. It now expects free cash flow to be in the range of $350 million to $390 million after capital expenditure of $185 million.
At the midpoint of its free cash flow guidance, Crown is yielding 8.3% of its market capitalization — a solid premium over the yield on five-year Treasuries. At 14 times the 2009 consensus estimate (at the very low end of the company’s five-year P/E range), it is hard to argue that investors have priced in significant growth.
Disclosure: At time of publication William Trent has no financial position in the companies mentioned.
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