You might say that Crown Holdings (NYSE:CCK) helped investors develop a can-do attitude last month. You might say that it succeeded by thinking inside the box. You might say it helped make my subscribers’ portfolio a complete package.
Or you might skip the funny business and just say Crown ripped higher in December because the packaging maker is doing all the things that its supporters knew it could do a decade ago after shares had plunged from a high of $60 in 1997 to a low of 83 cents in 2001.
Crown exited my monthly focus list in Strategic Advantage on Dec. 31 with a 9% gain, but I recommended that investors hold onto it. Here’s why:
Based in Philadelphia, Crown is one of the world’s top producers of containers for consumer goods. You may not know the name, but you have seen its work if you have sprayed your skin with insect repellent or antiperspirant, sipped from a can of soda or opened up a tin of tuna. Your cupboard is filled with Crown products — you just didn’t know it.
Crown posted sales of $7.9 billion in 2009, and now sports a market cap of $5.4 billion, putting it in the top 15 container companies worldwide. It’s small enough to be nimble but large enough to take on any job. It’s exactly what I am always talking about when it comes to the power of medium-sized public companies, or mid-caps as they are known in Wall Street jargon.
The company’s high level of debt is a turn-off to some, but is commonplace for packaging makers looking to purchase large quantities of raw materials before spikes in demand. And besides, a look at the balance sheet shows the company holds $415 million in cash as well. While Crown doesn’t pay a dividend, it boasts a very positive return on equity and has plenty of cash flow to keep paying down its bonds, loans and other forms of leverage.
Because a majority of customers provide Crown with estimates of orders well in advance, the debt helps Crown match production to sales. Accurate forecasts of revenue have provided more freedom in investing decisions too, as $600 million in stock repurchases were recently approved through 2012 — you know I love that. Steady share repurchase programs are the hidden lever that make a lot of successful companies achieve greatness in the market.
Crown operates 136 plants in 41 countries across the Americas, Europe, and the Asia-Pacific region. Steel and aluminum are its main inputs for its design and manufacturing business aimed primarily at customers in the food, beverage, household, and personal care products industries.
One of the reasons for solid performance during the economic downturn was a more budget conscious end-user. People decided to eat at home more often, which led to higher proportions of income going to groceries and packaged goods. As restaurants struggled with lower volume, Crown weathered the storm.
The firm was founded in the late 1890s by William Painter, who is credited with being the father of the bottle cap. Since then, innovation has remained a driving force behind the company. Crown developed the modern aerosol can in 1952. Most recently, it won five Best In Metal Awards at the 2009 Metal Packaging Manufacturers Association. awards.
You’ve probably seen one of its innovations, the Easylift easy-open end on cat and dog food cans. The company notes: ”Now even consumers with limited mobility, such as seniors, children and the physically impaired, can access food products without using a can opener or other tools.”
Behind Crown’s recent success has been the quick growth of the middle class in emerging markets. With greater access to wealth, individuals have changed consumption habits and demanded more goods. Sales in India and China, the two most populous countries in the world, have been standouts in large part to the growth in the consumption of canned beer and other alcohol.
Management said recently it will leverage this success by opening new facilities in China, Turkey, and Brazil. Construction will be completed during the late part of 2011 and early 2012 and will be geared towards production of aluminum cans and glass bottles. With each new facility, Crown’s production capacity increases by 750 million to 1 billion additional cans each year.
Chief Executive John Conway told investors recently that the firm’s plants in China and Southeast Asia make it the region’s largest packager outside of Japan. Good thing, because Asia and Latin America alone represent 50% of the global market in glass containers. Growth in Brazil will only be augmented by its winning of bids to host the 2014 FIFA World Cup and the 2016 Summer Olympic Games.
The company’s goal to remain at the forefront of conservation remains intact even with expansion, as aluminum beverage cans are recyclable and sustainable and are shipped easily by the most environmentally neutral means, such as railroads.
Analysts expect CCK to earn $2.56 a share in 2011, pricing the stock at 12.5x forward earnings. However, Crown has exceeded estimates each of the last five quarters. Expect the firm to earn $2.70 a share on high demand and increased production capacity. At a P/E of 15.2x, my model produces a $41 price target for the coming year, which would be 20% higher than the current quote. Keep holding.
For more ideas like this, please check out my daily advisory services Traders’ Advantage, for a short-term approach; and Strategic Advantage, for a long-term approach.
