Thursday, July 24, 1997

Owens-Illinois
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Phone: 419-247-2400
Price (7/24/97): $31 1/16

HOW DID IT DOUBLE?

It is big. It is bad. It dominates the world of glass packaging, and it is getting bigger still. Of the 99 bottles of beer on the wall, well over half are made by Owens-Illinois.

The company has positioned itself as the #1 packaging company in the U.S., South America, India and Europe. It accomplished this feat through a string of key acquisitions. Most recently, in December 1996 the company purchased Avir S.p.A., the dominant glass container company in Italy, Spain, and the Czech Republic. In the same month, it also acquired some of the facilities of its bankrupt U.S. competitor Anchor Glass Container.

Investors have also taken notice of the massive debt restructuring that the company has undertaken. Owens-Illinois has refinanced or paid down $1.8 billion in debt over the first half of this year. It will pay off an additional $100 million in 9.95% notes this fall when they are redeemed. This refinancing will decrease interest expenses substantially and will leave the balance sheet in much better shape. In other words, a hot stock market, new acquisitions, and decreasing debt have led to this double.

BUSINESS DESCRIPTION

In addition to being the largest glass container maker in the U.S., Europe, North America, South America and India, the company also makes metal packaging and plastic containers and lids. Sixty-six percent of its revenue comes from the glass packaging division. The company has increased its competitive edge by developing its own glass bottle making machines that more efficient and cost-effective than competing machines.

In the glass packaging business, the company's key competitors are the Ball-Foster Glass Container Corp. and Consumer's Packaging of Canada. In the metal packaging sector competition comes from Ball Corp., Crown Cork and Seal, and Siligan. Competitors in plastic lids and containers are Continental Plastics, Graham Packaging, and Plastipak Packaging. The plastic container business is highly fragmented and without a dominant player.

FINANCIAL FACTS

Income Statement

      12-month sales: $3996.2 million
      12-month income: $206.1 million
      12-month EPS: $1.69
      Profit Margins: 5.2%
      Market Cap: $3783.4 million

      Balance Sheet
      Cash: $211.3 million
      Current Assets: $1701.1 million
      Current Liabilities: $1051.6 million
      Long-term Debt: $3407.7 million

      Ratios
      Price-to-earnings: 18.4
      Price-to-sales: 0.95

HOW COULD YOU HAVE FOUND THIS DOUBLE?

An investor who noted the large Avir acquisition and the bankruptcy of its largest domestic competitor could have been alerted to the possibility that Owens-Illinois might enjoy a move up in price. However, many of the key ingredients for a big stock move were not apparent late last year. Earnings reports weren't spectacular. This was simply a big company in a boring business going about its work.

The tide of the market has lifted a lot of boats, and the big boats have done the best. Owens-Illinois has benefited from good news and the strong market at large.

WHERE TO FROM HERE?

The average American uses 175 glass containers per year. In China the per capita glass container usage rate is 5, in Latin America it is 26, and in Europe it is 35. Besides a graphic demonstration of the wastefulness of Americans, it also shows why overseas expansion could lead to significant growth for Owens-Illinois.

With a large company like Owens-Illinois, the best way to value the stock is using the YPEG. Earnings estimates for fiscal year 1998 are for $2.30 per share and the long-term growth rate is estimated at 13%. This gives a YPEG value of around $30, right about the current stock price.

Although the debt has been admirably restructured by the company's management, it still remains at nearly 80% of market capitalization. This remains a highly leveraged company. Given that fact and the YPEG valuation, I don't see another double any time soon.

-Mark Weaver, MD ([email protected])

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