Osvaldo Hernandez/iStock via Getty Images
In August, I took a look at Ball Corporation (NYSE:BALL) after it announced the divestment of its aerospace segment. The company sold its aerospace unit in a $5.6 billion deal in order to streamline operations and reduce debt, with a relative limited impact on earnings seen.
The investment case relied largely on improvements in the core business, which remains a big if, certainly as the deal with BAE is still pending, making me cautious as shares participated in a late 2023 rally as well.
On Ball
Ball is a diversified player, producer and distributor of aluminum cans, with household consumer packing businesses being its clients, with customers including the likes of Coca-Cola, Heineken, L’Oréal, and others. Outside the core cans business, the company served clients like NASA and Boeing in its diversified aerospace segment, which now has been sold.
The company claims that while aluminum cans are the accepted packaging form for energy drinks, huge inroads are to be made in other drink categories such as sparkling drinks (often still consumed out of plastics or glass bottles) and certainly within beers.
A greater focus on ESG and recycling benefits aluminum cans as well, with aluminum melting at lower temperatures compared to other materials, with aluminum being equally usable after the recycling process, being another key benefit from this perspective.
With all these tailwinds, the company grew 2022 sales by 10% to $15.3 billion, although that does not tell a lot given the inflationary environment, which was clearly seen on the bottom line with operating profits down 6% to $1.21 billion, as higher interest rates make that net earnings fell by 18% to $732 million. This meant that reported earnings fell by forty cents to $2.25 per share, as adjusted earnings came in at $2.78 per share, with that number looking clean.
This number marked a big pullback from a $3.49 per share adjusted earnings number in 2021, with earnings pressure observed following inflation, higher energy prices and the divestment of the Russian operations.
The problem was that of an $8.4 billion net debt load as of the end of 2022. With EBITDA trending around $2 billion, this resulted in a leverage ratio in excess of 4x. Moreover, capital investment of $1.7 billion exceeded depreciation charges by a billion. With 316 million shares trading at $55, the company obtained a $17.4 billion equity valuation, or $25.8 billion enterprise valuation.
A Tougher 2023 – Selling Aerospace
With sales and earnings under pressure in the first half of 2023, net debt ticked up to $8.8 billion and EBITDA fell to $1.9 billion, the company reached a deal with BAE Systems in August to sell its aerospace business in a $5.6 billion deal.
With a $2 billion revenue number reported by the unit, Ball fetched a 2.8 times sales multiples, and it reported a 20 times EBITDA multiple, or about $285 million in dollar terms. Something less impressive is that net proceeds are seen at $4.5 billion, yet the divestment still allows net debt to be cut in half. Moreover, these net proceeds will make for a largely neutral impact on the bottom line as the business recently issued debt of around 6%, making the deal largely neutral to earnings.
Pro forma EBITDA will fall to $1.6 billion, yet with net debt down to $4.3 billion, I believe that leverage ratios might fall nearly two turns to 2.7 times. We will likely not see such leverage ratios for a long period of time as the company announced a $2 billion buyback program alongside the deal announcement.
A Look Post The Deal
With earnings seen around $2.50 per share following the divestment of the Aerospace business, it was hard to get too upbeat at $55 per share in August, as the company still traded at a small premium to the market and still carried some leverage.
The wild card was of course that the inflationary environment has hurt operating margins by a few points, revealing potential, if margins can revert to their long-term averages. This is clearly seen in the share price as a $90 stock in 2020 and 2021 has come down quite a bit, with few triggers on the horizon to see an imminent appeal in the margins, which stood at the basis of my neutral stance.
Back To $55
In the months which followed, shares actually fell from the mid-fifties to $45 in the fall as higher interest rates and concerns about the economy hurt shares even more, although a big rally in the market in recent weeks helped the shares recover to $56 per share at this point in time.
On the news front, it has been relatively quiet, with the third quarter earnings release in November being the largest event. Third quarter sales were down nearly 10% to $3.57 billion on the back of lower volumes and pricing. Reported third quarter operating earnings fell sharply, but that was mainly due to a one-time benefit last year, as adjusted for that, margins were pretty flat.
In fact, year-to-date revenues were down 10% to $10.6 billion, although the relative operating margins improved slightly to 9% and changed. The big factor which has changed are rapidly higher interest expenses, now coming in at an annualised $500 million, due to a still large net debt load of $8.3 billion. The business is aided on the debt front from a reduced capital spending angle, with capital spending seen down to around $1.2 billion in 2023, only exceeding depreciation charges by around $500 million.
Otherwise, there were no big drivers in the report, with no guidance for the fourth quarter being given, as the deal with BAE to sell the aerospace business is still pending.
Concluding Thoughts
Pro forma revenues of the business are pegged at $12-$13 billion as the business on a historical basis should be able to post EBIT margins near 10%, for a midpoint of $1.25 billion in EBIT. With pro forma net debt seen at around $4.5 billion, the business should be able to post net earnings of around $800 million if we factor in a 20% tax rate, for realistic earnings of around $2.50 per share.
That suggests that the upside is really limited here, unless the company can demonstrate much higher margins, or show rapid growth (which it has done in the past) but not recently. From a cash flow point of view good news is seen, as capital spending, which is seen at $1.2 billion in 2023, is set to come down further in 2024, providing some ease on free cash flows, but still net capital investments are made into the business.
Given all of this, I am not in a hurry to drop the ball here to get involved.
