You might not guess it from the stock price, but Ball Corporation (NYSE:BLL) seems to have beat earnings on Thursday. Reporting financial results for its fiscal third quarter 2015, Ball reported a profit fully $0.15 ahead of what Wall Street had been looking for -- and yet, investors sliced 1% off the stock price regardless.
What went wrong?
Announcing Q3 2015 financial results on Thursday, Ball Corp reported:
- Quarterly sales of $2.1 billion, which were down roughly 5% against last year's Q3, and just shy of analyst estimates as well.
- Earnings per share of just $0.32, down 69% from the $1.04 earned in last year's third quarter.
- Ball Corp blamed $0.78 in after-tax charges for restructuring, debt refinancing, and "economic hedging losses" for the decline. But for these expenses, the company's $1.10 per share in profits would have been roughly flat against last year's profit, and exceeded analyst pro forma expectations for Q3 2015.
Ball Corp, which despite still bearing the name that made it famous for canning jars, no longer makes Ball jars. Ball is, however, still heavily involved in "canning," through its metal beverage packaging and metal food and household products packaging divisions -- which, according to S&P Capital IQ, account for about nine out of every 10 cents in revenue Ball collects in a year.
Sales and revenues within the beverage divisions were down slightly year over year, according to the company's report, in both the key Americas and Asia division and in the less important Europe division. The food and household products division, Ball's third-largest, suffered even more, with sales off by 17% year over year, and profits down 29%. Only the company's smallest division, which focuses on aerospace and technologies work for the space program, showed any signs of life, with earnings inching up less than 1% despite an 8% decline in revenues.
What might go right?
It almost goes without saying that investors were not thrilled with these results, and bid the stock down 1% in response to the news. And yet, the news isn't all bad. For one thing, Ball CEO John Hayes says that "difficult year-over-year volume comparisons and aluminum premiums headwinds are behind us" and 2016 results are likely to look better than the declining sales and earnings that have so far characterized 2015.
In addition to the poor GAAP results, declining cash flow and rising capital investment costs have left Ball with free cash flow of just $240 million produced so far this year -- a 40% decline from the company's performance through the first three quarters of 2014. But next year, Hayes says, he expects to see Ball produce free cash flow "in the range of $550 million" exclusive of acquisition costs. Depending on how bad those are, this implies a potential for cash profits to explode upward in the coming year -- perhaps as much as doubling.
Even so, the best-case scenario for Ball still seems to be a valuation of about 16.7 times 2016 free cash flow levels. That seems a bit rich for a stock that, according to analysts polled on S&P Capital IQ, can be expected to grow its profits at no better than about 10% annually over the next five years.
Long story short, even if everything goes right with Ball, and the company hits every target management has set for it... there still seems little reason for an investor to go long Ball stock today.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 280 out of more than 75,000 rated members.
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