Fisher College of Business
Ball Corporation
45.87
Current Price:
Analyst Information:
Name: Jacob P. Seegers
Email: seegers_3@cob.osu.edu
Phone: 614-850-8019
Advisor: Royce West, CFA
Course: Finance 824
Date: March 8th, 2005
Net Income by Division
Aerospace and
Technology
10%
North American
Packaging
57%
International
Packaging
33%
Chart: BLL
BLL
Price Target (1 year): 40.72
Year
EPS Estimates
Consensus Estimates
Rating:
2007E
3.26
2006E
3.02
2005E
2.79
3.19
3.18
2.89
High
3.19
3.30
3.00
Low
3.19
3.00
2.75
SELL
2004
2.67
Recommendation Summary
1. Record earnings growth may not be sustainable, as only the most
optimistic assumptions project continued rates of earnings
expansion.
2. Ball is more sensitive to interest rate changes than other sector
stocks (e.g. paper packagers) and interest rates are rising.
3. Long-term contracts may limit Ball in benefiting from lower
commodity prices
4. The dollar has strengthened since 2004 and may continue this trend,
which would have a significant impact on Ball’s bottom line.
5. Government demand for A&T may decrease as democracy spreads
and the US withdrawals from Iraq
6. Demand seems to be shifting from metal beverage and food
containers, Ball’s core business, to flexible and plastic packaging.
Supply exceeds demand.
7. Ball’s stock is expensive under every valuation measure, in spite of
optimistic assumptions.
Chart: S&P 500
Table of Contents
Page
Company Overview
North American Packaging
International Packaging
Aerospace and Technologies
Economic Overview
Market Outlook
Sector Outlook
Industry Analysis
Company Analysis
North American Packaging
International Packaging
Aerospace and Technologies
Financial Statement Analysis
Forecasted Earnings
Company Valuation
General Valuation
Discounted Cash Flow Model
Simple Factor Model
Summary
Recommendation
2
2
3
4
5
7
8
10
11
11
12
13
14
16
17
17
20
20
24
24
Appendix
Income Statement
Balance Sheet
Statement of Cash Flows
Earnings Model
DCF Model
DCF Model with Solver
Selected Regression Outputs
25
25
26
27
28
29
30
31-32
1
COMPANY OVERVIEW1
Ball Corporation was organized in 1880 and incorporated in Indiana in 1922. Its principal
executive offices are located at 10 Longs Peak Drive, Broomfield, Colorado 80021-2510.
Ball is a manufacturer of metal and plastic packaging, primarily for beverages and foods,
and a supplier of aerospace and other technologies and services to government and
commercial customers.
The company’s businesses are comprised of three segments: (1) North American
packaging, (2) international packaging and (3) aerospace and technologies.
North American Packaging
Ball’s principal business in North America is the manufacture and sale of aluminum, steel
and polyethylene terephthalate (PET) containers, primarily for beverages and foods. This
segment represented 65 percent of Ball’s consolidated net sales in 2004.
A substantial part of North American packaging sales are made directly to companies in
packaged beverage and food businesses, including SABMiller and bottlers of Pepsi-Cola
and Coca-Cola branded beverages and their affiliates that utilize consolidated purchasing
groups. Sales to SABMiller plc and PepsiCo, Inc., represented approximately
11 percent and 9 percent of Ball’s consolidated net sales, respectively, for the year
ended December 31, 2004.
Research and development (R&D) efforts in the North American packaging segment are
directed toward the development of new sizes and types of metal and plastic beverage
and food containers, as well as new uses for the current containers. Other research and
development efforts in this segment generally seek to improve manufacturing
efficiencies.
North American Metal Beverage Containers
North American metal beverage containers represent Ball’s largest product line,
accounting for 67 percent of segment net sales and 44 percent of consolidated net
sales in 2004. Decorated two-piece aluminum beverage cans are produced at
16 manufacturing facilities in the U.S., one facility in Canada and one in Puerto Rico.
Can ends are produced within four of the U.S. facilities, as well as in a fifth facility that
manufactures only ends. Annual production capacity is approximately 32 billion cans.
Metal beverage containers are primarily sold under multi-year supply contracts to fillers
of carbonated soft drinks, beer and other beverages.
North American Metal Food Containers
1
Ball Corporation 2005 Annual Report
2
In addition to metal beverage containers, Ball produces two-piece and three-piece steel
food containers for packaging vegetables, fruit, soups, meat, seafood, nutritional
products, pet food and other products. These containers are manufactured in 12 plants in
the U.S. and Canada and sold primarily to food processors in North America. In 2004
metal food container sales comprised approximately 22 percent of segment net sales
and 14 percent of consolidated net sales. Approximately 33 billion steel food
containers were shipped in the U.S. and Canada in 2004, approximately 21 percent of
which we estimate were shipped by Ball.
North American Plastic Containers
PET containers represented approximately 11 percent of segment net sales and
7 percent of consolidated net sales in 2004. The company operates five PET facilities in
the U.S. Competition in the PET container industry includes several national and regional
suppliers and self-manufacturers. Service, quality and price are important competitive
factors. The ability to produce customized, differentiated plastic containers is becoming a
key competitive factor.
Most of Ball’s PET containers are sold under long-term contracts to suppliers of bottled
water and carbonated soft drinks, including bottlers of Pepsi-Cola branded beverages and
their affiliates that utilize consolidated purchasing groups. Ball’s plastic beer containers
are being tested by several customers and Ball is developing plastic containers for the
single serve juice market.
International Packaging
Europe
Ball Packaging Europe’s operations, which accounted for 20 percent of Ball’s
consolidated net sales in 2004, consist of nine beverage can plants and two aluminum
beverage can end plants, a technical center in Bonn, Germany, and the European
headquarters in Ratingen, Germany. Of the 11 plants, four are located in Germany, three
in the United Kingdom, two in France and one each in the Netherlands and Poland. In
total the plants produced approximately 11 billion cans in 2004, with approximately half
of those being produced from steel and half from aluminum. Four of the can plants use
steel only, four use aluminum and one plant uses both metals.
Ball Packaging Europe is the second largest metal beverage container producer in
Europe, with an approximate 30 percent of European shipments, and produces two-piece
beverage cans and can ends for producers of beer, carbonated soft drinks, mineral water,
fruit juices, energy drinks, isotonics, milk-based beverages, coffee drinks and alcoholic
mixed drinks. In Western Europe, Ball Packaging Europe is the top metal beverage
container manufacturer in Germany, France and the Benelux countries and the second
largest metal beverage container manufacturer in the United Kingdom. In addition, it has
contributed to the development of the eastern European beverage business and is the
second largest metal beverage container manufacturer in Poland. In 2004 Ball began
3
construction on a new aluminum beverage can manufacturing plant in Belgrade, Serbia,
to serve the growing demand for beverage cans in southern and Eastern Europe. This
plant is expected to commence production in the second quarter of 2005.
Other International
Through Ball Asia Pacific Limited, Ball is one of the largest beverage can manufacturers
in the People’s Republic of China (PRC) its facilities are among the most modern in that
country. Capacity grew rapidly in the PRC, resulting in a supply/demand imbalance to
which we have responded in recent years by closing facilities. Our current operations
include the manufacture of aluminum cans and ends in three plants and high-density
plastic containers in two plants. Sales in the PRC represented 3 percent of consolidated
net sales. We also participate in joint ventures that manufacture aluminum cans and ends
in Brazil and in the PRC. In the fourth quarter of 2004, we recorded an allowance for
doubtful accounts in respect of a receivable of a 35-percent owned joint venture in the
PRC.
Aerospace and Technologies
The aerospace and technologies segment includes defense operations, civil space systems
and commercial space operations. The defense operations business unit includes defense
systems, systems engineering services, advanced antenna and video systems and electrooptics and cryogenic systems and components. Sales in the aerospace and technologies
segment accounted for approximately 12 percent of consolidated net sales in 2004.
The majority of the aerospace and technologies segment business involves work under
contracts, generally from one to five years in duration, as a prime contractor or
subcontractor for the National Aeronautics and Space Administration (NASA), the U.S.
Department of Defense (DoD) and other U.S. government agencies. Contracts funded by
the various agencies of the federal government represented approximately 82 percent and
96 percent of segment sales in 2004 and 2003, respectively. Civil space systems, defense
systems and commercial space operations include hardware, software and services sold
primarily to U.S. customers, with emphasis on space science and exploration,
environmental and Earth sciences, and defense and intelligence applications. Major
contractual activities frequently involve the design, manufacture and testing of satellites,
remote sensors and ground station control hardware and software, as well as related
services such as launch vehicle integration and satellite operations.
Other hardware activities include: target identification, warning and attitude control
systems and components; cryogenic systems for reactant storage, and sensor cooling
devices using either closed-cycle mechanical refrigerators or open-cycle solid and liquid
cryogens; star trackers, which are general-purpose stellar attitude sensors; and faststeering mirrors. Additionally, the aerospace and technologies segment provides
diversified technical services and products to government agencies, prime contractors and
commercial organizations for a broad range of information warfare, electronic warfare,
avionics, intelligence, training and space systems needs.
4
The company’s aerospace and technologies segment has contracts with the U.S.
government or its contractors which have standard termination provisions. The
government retains the right to terminate contracts at its convenience. However, if
contracts are terminated in this manner, Ball is entitled to reimbursement for allowable
costs and profits on authorized work performed through the date of termination
ECONOMIC OVERVIEW
GDP
Fourth quarter 2004 GDP growth beat consensus expectations, rising by 3.8%. The
strength of last year’s Q4 growth indicates that the US economy has not finished
expanding. GDP growth in 2005 should continue at a healthy rate, although it is unlikely
to match 2004 numbers, as energy prices remain at all-time highs, the current account
deficit continues to be quite wide, the pace of consumer spending seems to be decreasing
(4.2% Q4 2004 vs 5.1% Q3 2004)2, and inflationary pressures may induce the Fed to
increase interest rates at and increased pace.
Commodity Prices and Oil
A recent article in Barron’s suggests that the global news flow of positive economic
stories is a strong leading indicator of future commodity prices3. Stories of economic
strength have decreased from 73% of all news articles in June, 2004 to 57%, indicating
that commodity prices may be flirting with tops. Furthermore, abnormal commodity
price increases have been spurred by China’s unquenchable appetite for these products.
China may be growing too fast for its own good; however, as the country’s increased
demand for electricity has surpassed its supply2. As a result of this bottleneck, Chinese
authorities have decreased lending in an effort to cool domestic growth. This will
inevitably place increased downward pressure on commodity prices.
Shell recently announced its agreement with Qatar in the development of a $6 billion to
$7 billion liquefied natural gas plant. This action adds to the argument that capacity and
production will be stimulated at current inflated price levels, driving prices down4.
In addition, steel and aluminum charts have demonstrated abnormal growth rates that are
unlikely to be sustained. It seems that a near-term correction, at the minimum, needs to
take place.
Interest Rates
Alan Greenspan and the Fed have not been vague: rates will continue to increase. The
question is: at what rate will these increases take place? The Fed has raised rates by a
quarter point on five separate occasions since the beginning of 2004. It is reasonable to
expect that, going forward; rates will continue to increase by at least 25 basis points
during the next few Fed meetings. Rates could increase at an increased pace if economic
2
Wall Street Journal, “Revised Look at 4th Quarter Shows Stronger GDP Growth,” February 25, 2005
Barron’s Online, “Commodity Price Increases are Slowing,” February 11th, 2005
4
WSJ, “Shell, Qatar Sign LGN Pact,” February 27, 2005
3
5
growth fails to slow to a moderate pace, or if inflation moves forward dramatically. The
Fed will likewise keep a watchful eye on the dollar, as its recent weakness has spurred
deep concern from the European Central Bank.
The Dollar
Outlook on the dollar is positive. European money supply is growing at an accelerated
rate compared with that of the US dollar5. Similarly, US interest rates are expected to
increase at a faster pace than European rates, which should increase demand for dollardenominated investments. Expected growth in demand for the dollar, and the greater
supply growth of the Euro, should limit $/Euro upside potential. A recent article in
Futures Magazine predicts a 15% appreciation in the US dollar over the next six months
based in the observed historical 12-month lag time between rate changes by the Fed and
their impact on the dollar (see Figure 1)6.
Figure 1:
5
6
Futures Magazine, “The Euro and the Logic of Money,” March, 2005, p.46
www.futuresmag.com, “The US Dollar and Fed Moves,” February 7th, 2005
6
Figure 2: Economic Charts
StockVal®
2000
2001
2002
2003
2004
2005
HI
LO
ME
CU
3.5
2.0
6.86
0.96
1.74
2.53
1.0
02-25-2000
02-25-2005
0.5
FEDERAL FUNDS RATE %
HI
LO
ME
CU
GR
40
30
20
55.17
18.00
30.02
51.49
11.1%
02-25-2000
02-25-2005
15
CRUDE OIL ($ PER BBL) NF
1.0
HI
LO
ME
CU
GR
0.8
02-25-2000
02-25-2005
1.2
1.35
0.84
0.98
1.32
6.1%
EUROS IN US $S:W EEKLY
HI
LO
ME
CU
2
2.1
0.1
1.1
1.5
1
03-31-2000
12-31-2004
0
GROSS DOMESTIC PRODUCT ($BIL) 3-MO % CHANGE
What does it all mean?
Given the snapshot above, the future economic environment will be most conducive to
stocks that fare best during moderate domestic growth, falling commodity prices,
increasing interest rates, and an appreciating dollar.
MARKET OUTLOOK
Fundamentals
The market is poised to grow. Bush is back in the Whitehouse, which means that tax rates
should remain low, and policy is improving overall. Elections in Iraq went better than
expected, and although the turmoil is not over, a stable democracy is on the horizon. The
US seems to be making some headway with Iran and Korea, Lebanon will hold elections
in May, and, who knows, maybe even Putin will embrace true democracy. Economic
growth is still strong, and should see further stimulus as commodity prices diminish.
7
Technicals
For the S&P 500, long and short-term charts are bullish, exhibiting higher highs and
lows, and shallow pull-backs. On Friday, March 4th, 2005, the S&P 500 closed above a
significant previous high that was made in December, 2004 (Figure 3). The breakout was
made on stronger volume than the December high. This occurrence is extremely bullish
for the overall market.
Figure 3:
SECTOR OUTLOOK
The basic materials sector is a mature sector, consisting primarily of commodity
producers. Products are typically undifferentiated and competition is fierce. Price is king.
The sector in general seems to be driven primarily by 3 factors: (1) commodity prices; (2)
US dollar strength; (3) the stock market environment.
Commodity Prices
The materials sector typically performs best during periods of high commodity prices,
because the majority of the sector consists of metal and chemical producers that benefit
from inflated output prices. However, companies within packaging industries perform
best during times of low commodity prices, as input prices are lower.
US Dollar Strength
Figure 4 shows the negative correlation between the materials sector and the strength of
the US dollar. This negative correlation allows the sector to be used as a currency hedge
against US dollar depreciation. The explanation for this relationship is the sector’s makeup of large companies, like Alcoa, that obtain a significant percentage of revenues
8
internationally. The fact that most of these companies produce undifferentiated products
reduces international trade, essentially, to currency exchange.
Figure 4:
S&P MATERIALS SECTOR COMPOSITE ADJ (SP-15) Price 47.2
2000
2001
2002
2003
StockVal®
2004
2005
48
45
42
HI
LO
ME
CU
GR
39
37
34
47
26
34
47
7.5%
32
30
28
02-25-2000
02-25-2005
26
PRICE
1.20
1.14
1.08
HI
LO
ME
CU
GR
1.02
0.96
0.90
1.19
0.74
1.02
0.76
-5.8%
0.84
0.78
02-25-2000
02-25-2005
0.72
US $ IN EUROS:W EEKLY
The Stock Market Environment
The materials sector is defensive in nature, and tends to underperform the market during
high economic growth (e.g. late 1990’s) and outperform the market during lackluster
market performance (e.g. post-2001).
Figure 5:
P R IC E R E L A T IV E T O S & P 5 0 0 C O M P O S IT E A D J U S T E D ( S P 5 A ) S to c k V a l®
FEB 1995 = 100
B A L L C O R P O R A T IO N (B L L )
D O W C H E M IC A L C O M P A N Y (D O W )
S & P M A T E R IA L S S E C T O R C O M P O S IT E A D J (S P -1 5 )
ANNUAL RATE
+ 7 .2 %
-1 .5 %
-4 .5 %
C U M U L A T IV E
+ 9 9 .0 %
-1 4 .1 %
-3 6 .5 %
2 2 0 0 2 /2 8 /9 5 - 0 2 /2 8 /0 5
BLL
180
160
130
120
100
SP5A
86
DOW
74
S P -1 5
63
54
46
39
33
28
24
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
9
INDUSTRY ANALYSIS
Ball is part of the containers and packaging industry, with a primary focus on metal food
and beverage containers. This industry tends to be cyclical in nature, and is in the mature
stage, although some segments have enormous growth potential.
External Factors7
Customers have become increasingly health-conscious, particularly since the advent of
the Atkins diet, which has fueled multiple subsequent diet fads. Organic health food
stores are popping up all over the place, as demand for healthier food and drink has
exploded. Health-conscious consumers are turning from traditional carbonated beverages
and embracing healthier alternatives like juice and bottled water, which are largely
packaged in plastic bottles.
Another emerging trend is that of package convenience. Packaging products are
traditionally undifferentiated, with price being the key driver. However, convenience has
recently become a prime consideration. With a greater percentage of the US population
aged over 45, and consumers’ fast-paced lifestyles placing downward pressure on free
time, demand has surged for functional and efficient packaging.
Finally, busy consumers have had less time to prepare and coordinate traditional family
meals, and single-person households are on the rise. These trends will lead to increased
sales of “quick-prepare” meals, which are generally contained in flexible packaging or
plastic containers.
Supply and Demand
The above mentioned factors will largely benefit producers of flexible and plastic
packaging. In the beverage segment, demand for plastic bottles is on the rise. In the food
container segment, demand has turned from traditional cans to innovative and convenient
plastic and aluminum stand-up pouches, and other lightweight and easy-to-store
alternatives.
Ball’s most recent 10-k states that supply exceeds demand in the metal beverage and food
containers segments. Excessive competition has led to significant industry consolidation,
which has left the majority of the market share to a few key players who will continue to
fight for survival.
Bottom Line
The containers packaging industry is poised to grow, as producers meet new customer
demand for value-added packaging. Traditional metal packaging is declining in favor,
while flexible and plastic packaging will likely exhibit substantial growth over the
next 3-5 years.
7
Euromonitor, “Packaging in the United States,” April, 2004
10
COMPANY ANALYSIS
Figure 6: Sales by Division
Ball Corp. is one of the Year
2004
2003
2002
2001
largest players in metal Sales (000,000's)
5440.2
4977
3858.9
3686.1
container production
% Change YOY
9.31%
28.97%
4.69%
0.58%
world-wide. The
US Packaging
3539.1
3314.4
3235.5
3104.3
company accounts for
%Change YOY
6.78%
2.44%
4.23%
0.54%
31% of US and Canada
Foreign Packaging
1248.1
1127.7
132.2
162.9
metal container
%Change YOY
10.68%
753.03%
-18.85%
-23.91%
Aerospace
653
534.9
491.2
418.9
manufacturing capacity
%Change YOY
22.08%
8.90%
17.26%
15.40%
and about one-third of
overall European capacity. In 2004, Ball achieved record sales of
$5.44B, up 9.31% from record 2003 levels, and increased net earnings by 28.58%. A
brief overview of individual segment performance will shed light on the company’s
success in 2004.
North American Packaging
In 2004, NAP accounted for 65.18% of BLL’s sales, and 56.89% of its EBIT. This
segment exhibits stable, slow growth. Over the last five years, NAP sales have increased
an average of 2.68% on an annual basis. Segment sales surged by 6.78% in 2004,
primarily due to the company’s recent acquisition of a manufacturing plant in California,
and entrance into the custom can market. Within this mature/declining industry, custom
cans (cans of different sizes and shapes than the traditional 12-oz can) show the greatest
potential for growth.
Segment Analysis:
Ball is one of the largest players in this segment. Metal and plastic packaging products
are undifferentiated, making price the key driver. Ball has been able to leverage its
economies of scale to provide its customers with prices that induce long-term contracts.
However, BLL’s clients are concentrated, and exhibit significant buyer power. Supplier
power is somewhat low, due to BLL’s size and access to multiple suppliers. Barriers to
entry are high in this segment, as the capital investment is extensive, and new entrants
will unlikely be able undercut BLL’s prices in the long-term. The threat of substitute
products is high, especially in metal food containers, as innovative, and healthier plastic
alternatives are emerging. Competition among existing competitors is very high.
Risks:
The primary risk for a large player in a mature industry is the loss of market share.
Competition is fierce; Ball’s upside potential market share gain is miniscule compared to
its potential downside loss. As mentioned above, the threat of substitutes are high, and
buyer power is strong. There is significant risk of market share erosion by smaller,
geographically specific competitors. BLL seems to think that historical relationships with
11
its clients will continue to drive future contracts, but in fact, the bottom line price in the
metals packaging segment.
Many of Ball’s long-term contracts are up for renewal and are currently under
negotiation. New contracts include a price-hike for 2005, and although Ball effectively
passed most cost increases on to its consumers in 2004, it is uncertain whether or not
customers will tolerate another round of price increases.
Ball has effectively hedged a large degree of its commodity exposure through long-term
contracts. This is an invaluable competitive advantage in periods of increasing input
prices. However, these contracts may limit the company’s benefit to decreased
commodity prices.
International Packaging
In 2004, international packaging sales increased by 10.68%, accounting for 22.05% of
total sales, and 32.62% of EBIT. European sales and attractive margins helped fuel Ball’s
performance, however, the 10.68% international sales growth was only about half of
Value Line’s projected growth8. Value Line’s projected growth rate accounted for the
recent European Court of Justice ruling that Germany’s law requiring a deposit on singleuse cans was illegal and hindered foreign investment. The new law provided called for
deposit refunds upon the customer’s return of the cans. In Ball’s most recent conference
call, however, management indicated that the new law has not yet been enforceable, and
has led many vendors to discontinue disposable containers.
Ball plans to begin manufacturing in its new Belgrade plant mid-2005. Given Europe’s
current growth opportunities in the packaging industry, international packaging
sales should grow at a rate of 10-12% YOY.
Segment Analysis:
The international packaging segment overview is similar to the NAP overview provided
above, but international growth potential surpasses domestic potential. In addition,
supplier power is significant, as 3 major players supply 95% of Europe’s aluminum and
steel needs.
Risks:
In Ball’s 2003 10-k, the company claimed that a 10% increase in the value of the US
dollar would reduce after-tax earnings over a one-year period by about $13.4M. This
translates to roughly 12 cents/share. During 2004, the Euro appreciated against the
dollar, from its lows in April, to its highs in December, by 16.5%. According to the
estimate above, the favorable decline of the US dollar contributed nearly 20 cents,
or 7.5% to 2004 EPS, accounting for one-third of the company’s earnings growth
over 2003 numbers. Since December lows, the dollar has gained 3.5% against the Euro.
8
Value Line Report, January 7, 2005
12
Continued dollar appreciation could lead to significantly decreased earnings. Ball’s stock
price seems to be inversely related to US dollar strength (similar to the sector as a whole),
especially beginning in 2001, which is when the company began extensive international
expansion (Figure 7).
Figure 7:
BALL CORPORATION (BLL) Price 44.5
2000
2001
2002
StockVal®
2003
2004
2005
46
36
30
HI
LO
ME
CU
GR
24
18
14
45
7
24
45
44.5%
12
10
8
02-25-2000
02-25-2005
6
PRICE
1.20
1.14
1.08
HI
LO
ME
CU
GR
1.02
0.96
0.90
1.19
0.74
1.02
0.76
-5.8%
0.84
0.78
02-25-2000
02-25-2005
0.72
US $ IN EUROS:W EEKLY
Ball’s domestic success can be largely attributed to the company’s ability to enter into
long-term contracts with its suppliers and customers. These contracts allow BLL to pass a
significant portion of increased input prices on to its customers, especially in the
beverage can segment. Ball does not have the same contractual guarantee overseas, and it
is uncertain whether or not price increase will be accepted9.
Aerospace and Technologies
Revenues in aerospace and technologies grew by 22.08% in 2004; significantly outpacing
BLL’s other two segments. This segment made up 11.34% of total revenues and 12.76%
of total EBIT in 2004. Over the past 5 years, A&T backlogs have increased by an average
of 15.38%. Historically, current backlog levels have been conservative estimates for
A&T revenues the following year. The A&T backlog in 2004 was $694M, up 7.76%
from 2003.
9
Value Line Report, January 7, 2005
13
Segment Analysis:
This segment is highly competitive and continues to consolidate, with big players
fighting for government deals.
Risks:
In 2004, 84% of BLL’s A&T segment revenues can be attributed to contract fulfillment
for the US government (primarily NASA and the Department of Defense). Government
contracts are cancelable at anytime the government sees fit. The geopolitical
environment since September 11th have fueled this segment, however, as Bush spreads
the doctrine of democracy, and attempts to trim the nations budget deficit, BLL’s A&T
segment may suffer.
Financial Statement Analysis
A full set of financial statements for BLL is provided at the end of this paper (pages 2527). Following is an analytical overview:
Figure 8 summarizes key ratios for Ball for the past four years.
Figure 8:
The figure shows steady
Year
2004
2003
2002
increases in liquidity
Current
1.25
1.07
1.15
measures, decreased
Quick
0.55
0.33
0.57
leverage, and increased
Inventory turn.
8.64
9.11
6.98
efficiency. Ball has clearly
made an effort to decrease A/R turnover
18.23
16.70
14.90
its long-term debt, and
TL/TA
75.73%
80.00%
87.94%
interest expense has
LTD/TL
45.35%
48.51%
51.02%
decreased accordingly.
COGS/Sales
81.50%
81.98%
83.71%
Cost of goods sold as a
Gross Margin%
18.50%
18.02%
16.29%
SG&A/Sales
4.92%
4.71%
4.42%
percentage of sales has
Int.
Exp./Sales
1.91%
2.84%
2.09%
decreased significantly, in
spite of inflated
EPS Basic
2.67
2.06
1.39
commodity prices, which
indicates that the
company has successfully implemented efficient manufacturing and inventory
management techniques. SG&A/Sales has increased (not to the same extent that
COGS/Sales has decreased), but that is expected, as this measure typically moves inverse
to COGS/Sales.
A brief comparison of Ball to its competitors and to the industry (Figure 9) reveals the
following: (1) BLL’s liquidity is average to low, compared with the industry; (2) BLL’s
total debt is on par with the industry average, but LTD/TL is over 4% lower than the
14
2001
1.38
0.44
8.20
18.33
77.79%
52.73%
85.24%
14.76%
3.95%
2.40%
(0.90)
industry norm; (3) Gross margin is lower by comparison. Ball’s relatively smaller
percentage of long-term debt has depressed its liquidity measures as compared with the
industry. This is only a problem if BLL has trouble meeting its current obligations.
Comparative gross margin% indicates that BLL may have room to expand margins. It is
difficult to say, however, how much, if any, BLL management will be able to increase
margins in the future, as efficiency has been a long-term focus of Ball management, and
margins are already at record lows for the company.
Figure 9:
Industry Comparison
BLL
Current
Quick
TL/TA
LTD/TL
COGS/Sales
Gross Margin%
SG&A/Sales
Interest Exp./Sales
CCK
SEE
OI
Industry
1.25
1.04
1.20
1.56
1.42
0.55
75.73%
45.35%
81.50%
18.50%
4.92%
1.91%
0.59
98.20%
48.59%
88.46%
11.54%
5.08%
5.72%
0.87
76.11%
63.11%
68.49%
31.51%
16.25%
3.80%
0.70
89.74%
62.54%
79.84%
20.16%
28.52%
7.97%
0.58
75.78%
49.47%
77.47%
22.53%
6.61%
2.74%
DuPont Analysis
DuPont Analytics
StockVal ®
BALL CORPORATION (BLL)
Price 44.550 02/25/05 FYE Dec
INT
MARGIN%
BURDEN
EBIT
EBT
-------
-------
Sales
EBIT
TAX
BURDEN%
ASSET
TURN
LEVERAGE
Assets
T
Sales
1 - ----
-------
-------
EBT
Assets
Equity
ROE
Acct
ROE
Rpt%
Adj%
Adj%
2004
9.91
0.81
68.01
1.27
4.51
31.21
-1.01
30.20
2003
8.95
0.72
68.69
1.21
6.31
35.35
1.17
36.52
2002
7.92
0.75
64.42
1.20
6.47
31.31
0.65
31.96
2001
-0.69
NMN
BEN
1.49
4.18
-16.72
36.27
19.55
2000
5.71
0.54
62.42
1.36
3.92
9.93
8.61
18.54
1999
7.52
0.61
62.09
1.33
4.25
15.87
0.00
15.87
1998
3.61
0.25
67.77
1.21
3.94
2.64
8.79
11.43
1997
5.83
0.60
62.75
1.30
3.06
9.41
-0.80
8.61
1996
2.79
0.47
75.68
1.36
2.79
4.08
1.56
5.64
1995
5.02
0.75
65.67
1.26
2.71
-3.10
12.39
9.29
1994
6.66
0.78
64.13
1.12
2.81
12.42
-0.37
12.05
1993
-0.32
NMN
BEN
1.07
2.78
-11.20
23.15
11.95
1992
9.60
0.73
62.66
0.97
2.47
11.08
-3.71
7.37
1991
9.80
0.74
62.07
1.09
2.47
12.06
-0.67
11.39
1990
6.03
0.75
67.06
1.11
2.40
11.47
-0.48
10.99
1989
64.97
1.24
1.99
8.65
-0.64
8.01
1988
61.21
1.17
1.82
12.43
-7.36
5.07
1987
58.12
1.23
1.90
15.82
-3.45
12.37
15
The above DuPont analysis confirms that management has successfully increased
margins and ROE over the past ten years. However, asset utilization has decreased, and
ROE growth appears to have flattened.
Analysis of the company’s statement of cash flows shows an increase in free cash flow
over the past five years. However, this growth has been rather volatile. The five-year FCF
mean growth rate is inflated by the triple-digit increase in 2001, so the 3-year mean
growth rate of 11.27% may be a better indicator of potential future FCF growth.
Figure 10:
Year
FCF
(000,000's)
2004
339.90
Change YOY
-6.90%
5-Year Mean
39.44%
11.27%
3-Year Mean
2003
365.10
24.23%
2002
293.90
16.49%
2001
252.30
224.29%
2000
77.80
-60.90%
Forecasted Earnings
See page 28 for a complete earnings model. The highlights are below:
Figure 11:
Year
EPS Estimates
Consensus Estimates
2007E
3.26
2006E
3.02
2005E
2.79
3.19
3.18
2.89
High
3.19
3.30
3.00
Low
3.19
3.00
2.75
2004
2.67
2.67
Figure 11 shows that my estimates are on the lower end of consensus estimates (except
for 2007). This is surprising, as the attached model is liberal in its assumptions, in favor
of Ball. Net sales are projected by breaking sales into segments. North American
packaging sales growth is assumed to be 5% going forward, which is nearly twice the
growth of the 5-year mean, but slightly lower than 2004 growth. International
packaging is assumed to grow at an annual rate of 12%, which is generous, for reasons
mentioned previously. A&T sales are projected to grow at a rate of 15%, which is well
above the 5-year mean of 11.68%.
Expense projections were also made in BLL’s favor. A flat tax rate of 31.50% is used,
as Bush has decreased manufacturer’s upper tax bracket, COGS/Sales is set at it’s 2004
low, depreciation is assumed to be the 5-year mean (in spite of Ball’s $300M forward
guidance for 2005 CapEx), and SG&A/Sales is assumed to be the 5-year mean, which is
well below 2004’s number. These assumptions project NE/Sales to be 5.24% for each
of the three years forward, which is nearly double that of the 5-year mean. Note that
EPS estimates include the assumption that Ball will repurchase shares in the amount of
$150-$175M during 2005.
16
The only conservative assumption that the model makes is in the reduction of projected
2005 sales by an estimated amount of early purchases, occurring in 2004, that were made
in anticipation of 2005 price hikes. This assumption decreases 2005 estimated EPS by
6 cents. The model does not account for the possible adverse effects of rising interest
rates, or a declining dollar.
It is evident that analysts are VERY optimistic in their current EPS projections.
COMPANY VALUATION
General Valuation
Figure 12:
BALL CORPORATION (BLL) Price 44.5
2000
2001
2002
StockVal®
2003
2004
2005
HI
LO
ME
CU
15
12
9
17.5
6.7
12.5
15.0
02-25-2000
02-25-2005
6
PRICE / YEAR-FORW ARD EARNINGS
HI
LO
ME
CU
12
8
4
21.8
1.9
6.0
6.7
02-25-2000
02-25-2005
0
PRICE / EBITDA
HI
LO
ME
CU
0.8
0.6
0.4
0.94
0.23
0.68
0.93
02-25-2000
02-25-2005
0.2
PRICE / SALES
HI
LO
ME
CU
9
11.2
3.3
8.5
10.1
6
02-25-2000
02-25-2005
3
PRICE / CASH FLOW ADJUSTED
Ball’s current price may be somewhat expensive on a 5-year absolute basis, as measured
by the four factors in Figure 12. Price/Sales and Price/Cash Flow measures are both near
five-year highs, and Price/Fwd Earnings is currently well above its mean. Ten-year
absolute measures tell the same story.
Data from Figure 13, and Ball’s financial statements were used to estimate the stock’s
price one-year forward. Price/Measure ratios were estimated as 10% above the 5-year
17
mean. Estimated 2005 raw data was taken from the accompanying earnings model and
cash flow estimates. This approach predicts a 2005 ending stock price of $44.41, which,
discounted back at the current cost of equity and accounting for dividends, assigns BLL a
current valuation of $41.97. Figure 14 demonstrates the sensitivity the stock price
valuation to Price/Fwd Earnings assumptions, and the current range of 2006 earnings
estimates.
Figure 13:
5-year Data
Price/Fwd Earnings
Price/EBITDA
Price/Sales
Price/Cash Flow
Mean 2005 Price Target
Current
15
6.7
0.93
10.1
Mean
12.5
6
0.68
8.5
Estimated
13.75
6.6
0.748
9.35
2005E
Raw
3.02
668.56
5735.9
525
2005E
Price
41.53
44.12
42.90
49.09
44.41
Figure 14:
Sensitivity Analysis: Current Valuation
2005E
Price/Fwd Earnings
EPS
-10%
Mean
Estimated
+10%
41.97
11.25
12.50
13.75
15.13
3.02
40.20
41.09
41.97
42.94
3.18
40.62
41.55
42.49
43.51
3.30
40.94
41.91
42.87
43.94
18
PV @
COE
39.26
41.70
40.56
46.36
41.97
Figure 15:
BALL CORPORATION (BLL) Price 44.5
2001
2000
2002
StockVal®
2003
2005
2004
HI
LO
ME
CU
0.8
0.6
0.4
0.95
0.27
0.67
0.94
02-25-2000
02-25-2005
0.2
PRICE / YEAR-FORW ARD EARNINGS RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-W td
HI
LO
ME
CU
1.0
0.5
0.2
2.45
0.19
0.79
0.86
02-25-2000
02-25-2005
0.1
PRICE / EBITDA RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-W td
HI
LO
ME
CU
0.6
0.4
0.2
0.64
0.10
0.45
0.62
02-25-2000
02-25-2005
0.0
PRICE / SALES RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-W td
HI
LO
ME
CU
0.9
0.6
0.3
1.07
0.19
0.74
0.88
02-25-2000
02-25-2005
0.0
PRICE / CASH FLOW ADJUSTED RELATIVE TO S&P 500 COMPOSITE ADJUSTED (SP5A) M-W td
Figure 15 shows that Ball appears to be expensive compared to the S&P 500 as well.
Figure 16 shows that the company is reasonable priced within the metal and glass
containers segment.
Figure 16:
B A L L C O R P O R A T IO N (B L L ) P ric e 4 4 .5
2000
2001
2002
S to c k V a l ®
2003
2004
2005
HI
LO
ME
CU
1 .1
1 .0
0 .9
0 .8
P R IC E / Y E A R -F O R W A R D E A R N IN G S R E L A T IV E T O S P 5 M E T A L & G L A S S C O N T A IN E R S (1 5 1 0 3 0 1 0 A ) M -W td
0 2 -2 5 -2 0 0 0
0 2 -2 5 -2 0 0 5
HI
LO
ME
CU
1 .8
1 .2
0 .8
1 .1 5
0 .8 4
0 .9 4
0 .9 7
2 .5 2
0 .7 6
1 .0 2
1 .0 2
0 2 -2 5 -2 0 0 0
0 2 -2 5 -2 0 0 5
0 .6
P R IC E / E B IT D A R E L A T IV E T O S P 5 M E T A L & G L A S S C O N T A IN E R S (1 5 1 0 3 0 1 0 A ) M -W td
HI
LO
ME
CU
1 .0
1 .0 4
0 .6 4
0 .8 1
0 .9 5
0 .8
0 2 -2 5 -2 0 0 0
0 2 -2 5 -2 0 0 5
0 .6
P R IC E / S A L E S R E L A T IV E T O S P 5 M E T A L & G L A S S C O N T A IN E R S (1 5 1 0 3 0 1 0 A ) M -W td
HI
LO
ME
CU
1 .2
1 .0
0 .8
1 .2 1
0 .7 5
0 .9 7
1 .0 1
0 2 -2 5 -2 0 0 0
0 2 -2 5 -2 0 0 5
0 .6
P R IC E / C A S H F L O W A D J U S T E D R E L A T IV E T O S P 5 M E T A L & G L A S S C O N T A IN E R S (1 5 1 0 3 0 1 0 A ) M -W td
19
Discounted Cash Flow Model
A complete DCF model may be found on page 29. Figure 17 shows the sensitivity
output generated by the model.
Assumptions:
Figure 17:
Cash flow from
BLL Stock Price Sensitivity Analysis
operations has
Disc. Rate
Growth Rate
amounted to 8%
37.9928914
8.00%
9.00% 11.27% 13.00% 15.00%
of total sales, on
average, from
6.00% 35.97
38.31
44.38
49.83
57.19
2000 – 2004. 8%
of 2005 projected
7.00% 33.52
35.63
41.10
46.00
52.61
sales is
33.08
37.99
42.39
48.30
8.06% 31.19
$458.87M;
however, given
9.00% 29.33
31.05
35.52
39.52
44.89
record cash flow
from operations
29.10
33.16
36.77
41.62
10.00% 27.53
of $535.90M in
2004, 2005 OCF is projected to be $525M. In its Q4 2004 earnings report, Ball
estimated 2005 capital spending to be $300M. Hence, 2005 projected FCF is $225M. As
noted in Figure 10 the 3-year growth rate mean for Ball’s
FCF is 11.27%. This seems like a relatively high rate of growth for a mature company to
sustain long-term. In order to give BLL the benefit of the doubt, however, 2005 estimated
FCF is projected through 2019 at an annual growth rate of 11.27%. Future cash flows are
discounted back at 8.06% (BLL’s cost of equity, according to Bloomberg), yielding a
valuation of $37.99/share. Under the model’s assumptions, FCF must grow at a rate of
14.22% annually (see page 30) to justify BLL’s current stock price. Again, this model
is optimistic.
Simple Factor Model
The variation in Ball’s stock price can be largely explained by two factors: (1) T-bill
yields; (2) crude prices. Crude prices were used in the model as a proxy for commodity
prices in general (BLL’s inputs include steel, aluminum, and resins). Figure 18 shows
key regression outputs for each variable that was studied. Figures 19 and 20 show the
best-fit plots for BLL against crude and T-bills, respectively. Analysis was done on
monthly or weekly data beginning in 1985 or 1996 (depending on available data) to the
present (selected regression outputs may be found on pages 31 and 32).
20
Figure 18:
Regression Summary
T-bills (13-week)
Crude
Crude and T-bills
R2
Steel
Aluminum
Fed Funds Rate
0.7021
0.5175
0.8721
Intercept
33.5692
-6.4021
14.1637
0.6291
0.0073
0.4712
-2.7076
8.4397
24.3951
Slope
-4.8344
0.8011
0.5598
-3.5115
0.0255
4.6634
-2.4735
T-stat
(slope)
-15.6554
33.4494
11.6979
-15.0921
23.2954
2.7722
-30.4880
Figure 19:
Crude Line Fit Plot
50
BLL
40
30
BLL
Predicted BLL
20
10
0
0
20
40
60
Crude
Figure 20:
BLL
T-bill Line Fit Plot
50
40
30
20
10
0
BLL
Predicted BLL
0
2
4
T-bill
6
8
Linear (Predicted
BLL)
21
Figure 21 shows the simple factor model and sensitivity output that prices BLL, given
the current price of crude and 13-week T-bill yield. The model uses the regression
outputs in Figure 18 to estimate what the current stock price should be, given historical
correlations. The model estimates the current price to be $33.95. Similar prices, ranging
between $32 and $34, were derived when T-bills and steel, and the Fed rate and steel
were used as factors.
Figure 21:
T-bills
Current
Crude
T-bills
52.23
2.692
33.94692
2.500
2.692
3.000
3.250
3.500
40
27.78
27.10
26.02
25.14
24.26
Target P
BLL
33.95
45
30.57
29.90
28.82
27.94
27.06
Crude
52.23
34.62
33.95
32.87
31.99
31.11
55
36.17
35.50
34.42
33.54
32.66
60
38.97
38.30
37.21
36.34
35.46
This is not a perfect model, but it is a quick valuation check. It is clear that the crude
best-fit line generally under-estimates stock price. The model simply indicates that
BLL could be overvalued, given historical tendencies, and that price could reverse
toward the best-fit lines.
Regression analysis revealed a couple of additional findings. First, Ball’s stock price
seems to be highly sensitive to interest rates (Figure 22), which will be a determent
going forward. Secondly, the slope coefficients for steel and aluminum (bad R2) are
positive. This is interesting, as one would expect BLL’s performance to decrease with
increased commodity prices. This phenomenon can probably be explained by the fact that
commodity prices often increase with GDP, but maybe it is an indication that Ball’s
customer and supplier contracts truly mitigate its commodity exposure.
22
Figure 22:
BALL CORPORATION (BLL) Price 44.5
84
45
85
86
87
88
89
90
91
92
93
94
95
96
StockVal®
97
98
99
00
01
02
03
04
05
06
07
35
28
HI
LO
ME
CU
GR
22
17
13
45
6
8
45
10.5%
10
8
02-22-1985
02-25-2005
6
5
PRICE
9.4
7.2
5.4
HI
LO
ME
CU
4.2
3.2
9.37
0.83
5.18
2.69
2.4
1.8
1.4
02-22-1985
02-25-2005
1.0
0.8
US TREASURY BILL 90 DAY %
Target Price: $40.72
Figure 23: Target Price
Price Target
Price Ratios
Discounted Cash Flows
Factor Model
Mean
Current Price
Current
41.97
37.99
33.95
37.97
45.87
1-Year
45.04
40.74
36.37
40.72
Note: Forward price projections are the future values of current price valuations, given
Ball’s cost of equity, and accounting for dividends.
23
SUMMARY
The following table outlines the key arguments for and against owning BLL stock:
Pros
1. Financial statements look great.
Margins are increasing, debt is
decreasing, and 2003 and 2004 were
record years for sales and earnings.
2. Overall market outlook is positive, and
the packaging industry tends to move
with the market (Ball has a Beta of
.90).
3. Ball’s management is sound, and has
done a great job increasing company
efficiency and mitigating commodity
exposure through long-term contracts.
4. Ball is poised for European aluminum
packaging expansion.
5. Ball’s A&T division has produced
incredible results during the last few
years.
6. Ball has entered the custom can market
and is currently testing plastic beer
bottles with its customers.
Cons
1. Record earnings growth may not be
sustainable, as only the most optimistic
assumptions justify continued rates of
earnings expansion.
2. Ball is more sensitive to interest rate
changes than other sector stocks (e.g.
paper packagers) and interest rates are
rising.
3. Long-term contracts may limit Ball in
its benefit from lower commodity
prices
4. The dollar has strengthened since 2004
and may continue this trend, which
would have a significant impact on
Ball’s bottom line.
5. Government demand for A&T may
decrease as democracy spreads and the
US withdrawals from Iraq
6. Demand seems to be shifting from
metal beverage and food containers,
Ball’s core business, to flexible and
plastic packaging. Supply exceeds
demand.
7. Ball’s stock is expensive under every
valuation measure, in spite of
optimistic assumptions.
RECOMMENDATION
Ball is a well-managed company in a declining industry. Although the company has made
significant strides to invest in growing divisions, 81% of its income is still reliant on
metals packaging.
Ball is expensive on all fronts. The stock’s upside potential is limited, while the risk of
price depreciation is significant, given the current economic environment. Our basis in
the stock is $26.17/share. Given the current price, our total return is 75.27%. It is time to
take profits (tax-free) and invest in more attractive investments.
Stock recommendation: Sell our entire holding of BLL.
Sector Recommendation: Underweight by 100 basis points.
24
APPENDIX
Income Statement:
Income Statement
StockVal ®
BALL CORPORATION (BLL)
FYE Dec
2004
% Chg
2003
% Chg
2002
% Chg
2001
% Chg
2000
Revenues ($ Mil)
5440.2
9
4977.0
29
3858.9
5
3686.1
1
3664.7
Cost of Goods & Services
4433.5
9
4080.2
26
3230.4
3
3142.2
2
3067.1
Gross Profit
1006.7
12
896.8
43
628.5
16
543.9
-9
597.6
S G & A Expense
267.9
14
234.2
37
170.6
17
145.6
3
141.9
25.5
24
20.5
9
18.8
26
14.9
3
14.4
103.7
-18
125.9
67
75.6
-14
88.3
-7
95.2
R&D Expense
Interest Expense
Pre-Tax Income
435.2
36
319.7
39
230.2
-113.7
113.9
Taxes
139.2
39
100.1
22
81.9
-9.7
42.8
Net Income Reported ($ Mil)
295.6
29
229.9
47
156.1
Net Income Adjusted
286.1
20
237.5
49
159.3
EPS Reported
2.60
29
2.01
48
1.36
EPS Adjusted
2.51
21
2.08
50
1.38
43
113790
0
114274
-1
115076
0.35
46
0.24
33
0.18
Shares Outstanding (Thou)
Dividends Common (Per Shr)
Dividends Preferred ($ Mil)
0.0
0.0
0.0
-99.2
37
116.0
68.2
-9
127.3
0.97
-3
1.00
-2
117716
-5
124068
20
0.15
0
0.15
2.0
-23
2.6
-0.93
0.54
25
Balance Sheet:
Balance Sheet
StockVal ®
BALL CORPORATION (BLL)
FYE Dec
2004
% Chg
2003
% Chg
2002
Cash & Equivalents ($ Mil)
198.7
Accounts Receivable
346.8
Inventories
444
36.5
-86
259.2
39
250.1
-28
345.9
629.5
15
546.2
-1
552.5
70.6
-22
90.7
36
66.9
Total Current Assets
1245.6
35
923.5
-25
1224.5
54
Plant & Equipment Gross
2974.5
9
2736.9
8
2527.3
33
Accumulated Depreciation
1442.1
14
1265.8
17
1081.4
8
Plant & Equipment Net
1532.4
4
1471.1
2
1445.9
60
904.4
Other Long-Term Assets
1699.7
1
1675.0
15
1462.0
137
615.7
-9
676.8
3232.1
3
3146.1
8
2907.9
91
1520.1
-10
1680.5
4477.7
10
4069.6
-2
4132.4
79
2313.6
-13
2649.8
Accounts Payable
453.0
30
349.7
-20
439.6
70
258.5
-22
332.1
Short-Term Debt
123.0
14
107.6
-15
127.0
10
115.0
-9
125.7
Other Current Liabilities
420.3
4
403.8
-20
502.3
150
201.2
0
201.3
996.3
16
861.1
-19
1068.9
86
574.7
-13
659.1
1537.7
-3
1579.3
-15
1854.0
95
949.1
-6
1011.6
Total Long-Term Liabilities
2388.4
0
2394.5
-7
2565.0
109
1225.1
-5
1293.4
Total Liabilities
3384.7
4
3255.6
-10
3633.9
102
1799.8
-8
1952.5
6.4
3
6.2
11
5.6
-42
9.7
-35
14.9
Common Equity
1086.6
35
807.8
64
492.9
-2
504.1
-26
682.4
Total Equity
1086.6
35
807.8
64
492.9
-2
504.1
-26
682.4
4477.7
10
4069.6
-2
4132.4
79
2313.6
-13
2649.8
Other Current Assets
Total Long-Term Assets
Total Assets
Total Current Liabilities
Long-Term Debt
% Chg
2001
% Chg
2000
212
83.1
225
25.6
101
172.0
-25
230.2
23
449.3
-28
627.5
-25
89.1
4
86.0
793.5
-18
969.3
1904.8
0
1901.2
1000.4
11
897.5
-10
1003.7
Deferred Income Taxes
Other Long-Term Liabilities
Minority Interest
Preferred Equity
Total Liab & Equity
26
Statement of Cash Flows:
Cash Flow Analysis
StockVal ®
BALL CORPORATION (BLL)
FYE Dec
Net Income Reported ($ Mil)
Accounting Adjustment
Net Income Adjusted
2004
% Chg
2003
295.6
29
-9.5
% Chg
2002
% Chg
2001
229.9
47
156.1
7.6
138
% Chg
2000
3.2
-99
215.2
264
59.1
-99.2
68.2
286.1
20
237.5
49
159.3
37
116.0
-9
127.3
215.1
5
205.5
38
149.2
-2
152.5
-4
159.1
501.2
13
443.0
44
308.5
15
268.5
-6
286.4
Capital Expenditures
196.0
43
137.2
-13
158.4
131
68.5
-31
98.7
Free Cash Flow Adjusted
305.2
0
305.8
104
150.1
-25
200.0
7
187.7
Dividends Common ($ Mil)
39.8
45
27.4
32
20.7
17
17.7
-5
18.6
Free Cash Flow After Dividends
265.4
-5
278.4
115
129.4
-29
182.3
8
169.1
176.5
Depreciation & Amort
Cash Flow Adjusted
Net Cash From Operations
535.9
47
364.0
-20
452.3
41
320.8
82
Net Cash From Investing
-209.6
-69
-123.8
88
-1021.2
-731
-122.9
-134
-52.5
Net Cash From Financing
-168.1
64
-463.9
-140.4
-5
-134.2
4.0
300
Other Cash Flows
Change In Cash & Equiv
162.2
1.0
-222.7
741.4
-72
3.6
176.1
206
0.0
0.0
57.5
-10.2
27
Earnings Model:
Ball Corp.
(000,000's)
Net Sales
COGS
Deprec and amoritz
Business consolidation costs
Selling and admin.
Interest expense
Rec. Sec. Fees and Prod Devel
Earnings before taxes
Provision for taxes
Minority interest
Equity in earnings of affiliates
Net Earnings
Wtd avg # shs-basic
Wtd avg # shs-diluted
EPS-basic
EPS-diluted
Sales Increase
COGS/Sales
Change
Deprec and amoritz/Sales
S&A/Sales
Change
Interest expense/Sales
Gross Margin/Sales
Change
NE/Sales
Change
Tax rate
Net Sales
North Amer. Packaging
Change
International packaging
Aerospace and tech
Change
A&T Backlog
Change
Estimate of 2004 Early Buys
5-Year
FY07
FY06
FY05
FY04
FY03
FY02
Average
6,701.38
6,195.64
5,735.90
5,440.20
4,977.00
3,858.90
5,461.30
268.06
291.51
167.53
-
5,049.15
247.83
269.51
154.89
-
4,674.48
229.44
249.51
143.40
-
4,433.50
215.10
(15.20)
267.90
103.70
-
4,080.20
205.50
(3.70)
234.20
141.10
-
3,230.40
149.20
(2.30)
170.60
80.80
-
512.98
(164.15)
-
474.27
(151.77)
-
439.07
(140.50)
-
435.20
(139.20)
(1.00)
0.60
319.70
(100.10)
(1.00)
11.30
230.20
(81.90)
(1.50)
9.30
348.83
322.50
298.57
295.60
229.90
156.10
106,846
113,790
106,846
113,790
106,846
113,790
110,846
113,790
111,710
114,275
112,634
115,076
3.26
3.07
3.02
2.83
2.79
2.62
2.67
2.60
2.06
2.01
1.39
1.36
8.16%
81.50%
0.00%
4.00%
4.35%
0.00%
2.50%
18.50%
0.00%
5.21%
0.00%
32.00%
8.02%
81.50%
0.00%
4.00%
4.35%
0.00%
2.50%
18.50%
0.00%
5.21%
0.00%
32.00%
5.44%
81.50%
0.00%
4.00%
4.35%
-0.57%
2.50%
18.50%
0.00%
5.21%
-0.23%
32.00%
9.31%
81.50%
-0.49%
3.95%
4.92%
0.22%
1.91%
18.50%
0.49%
5.43%
0.81%
31.99%
28.97%
81.98%
-1.73%
4.13%
4.71%
0.28%
2.84%
18.02%
1.73%
4.62%
0.57%
31.31%
4.69%
83.71%
-1.53%
3.87%
4.42%
0.47%
2.09%
16.29%
1.53%
4.05%
6.74%
35.58%
6,701.38
3,954.76
5.00%
1,753.49
12.00%
993.13
15.00%
1,055.49
15.00%
6,195.64
3,766.43
5.00%
1,565.62
12.00%
863.59
15.00%
917.82
15.00%
5,735.90
3,587.08
5.00%
1,397.87
12.00%
750.95
15.00%
798.10
15.00%
128.975
5,440.20
3,539.10
6.78%
1,248.10
10.68%
653.00
22.08%
694.00
7.76%
4,977.00
3314.4
2.44%
1127.7
753.03%
534.9
8.90%
644
29.58%
3,858.90
3235.5
4.23%
132.2
-18.85%
491.2
17.26%
497
15.31%
8.48%
83.21%
4.09%
4.37%
1.92%
16.79%
2.65%
34.43%
2.68%
143.80%
11.68%
15.38%
Note: EPS projections are based on Ball financials beginning in 1998 (2002 and later
shown above)
Estimate of Early Buys is calculated as the excess Q4 2004 sales over that of Q4 2003
sales plus average daily 2003 sales times 5 (Q4 2004 had 5 less work days for Ball than
Q4 2003).
All other assumptions are noted in the paper.
28
DCF Model:
BLL
Free Cash Flow
Cash from operations
Add back withholding tax pay
related to Euro acquisition
Capital spending
2005
525.00
2004
535.90
2003
364.00
2002
452.30
2001
320.80
(300.00)
(196.00)
138.30
(137.20)
(158.40)
(68.50)
Free Cash Flow
Change
225.00
-33.80%
339.90
-6.90%
365.10
24.23%
293.90
16.49%
252.30
224.29%
11.27%
8.06%
FCF Growth R Disc. Rate
339.90
1.08
225.00
1.11
1.08
250.36
1.11
1.08
278.57
1.11
1.08
309.97
1.11
1.08
344.90
1.11
1.08
383.77
1.11
1.08
427.02
1.11
1.08
475.15
1.11
1.08
528.70
1.11
1.08
588.28
1.11
1.08
654.58
1.11
1.08
728.35
1.11
1.08
810.44
1.11
1.08
901.77
1.11
1.08
1,003.40
1.11
1.08
DCF
339.90
208.22
214.40
220.77
227.33
234.08
241.04
248.20
255.57
263.16
270.98
279.03
287.32
295.85
304.64
313.69
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
8,250.17
Shares outstanding
110.657
37.99
45.87
PV future CF/Shrs outstanding
Current Price
Cost of Equity (Bloomberg)
Cost of Debt (Bloomberg)
WACC (Bloomberg)
4,204.18
8.06%
3.08%
6.68%
29
DCF Model: Solving for Required Growth Rate
BLL
Free Cash Flow
Cash from operations
Add back withholding tax pay
related to Euro acquisition
Capital spending
2005
525.00
2004
535.90
2003
364.00
2002
452.30
2001
320.80
(300.00)
(196.00)
138.30
(137.20)
(158.40)
(68.50)
Free Cash Flow
Change
225.00
-33.80%
339.90
-6.90%
365.10
24.23%
293.90
16.49%
252.30
224.29%
14.22%
8.06%
FCF Growth R Disc. Rate
339.90
1.08
225.00
1.14
1.08
256.99
1.14
1.08
293.52
1.14
1.08
335.24
1.14
1.08
382.90
1.14
1.08
437.33
1.14
1.08
499.50
1.14
1.08
570.51
1.14
1.08
651.61
1.14
1.08
744.24
1.14
1.08
850.04
1.14
1.08
970.88
1.14
1.08
1,108.90
1.14
1.08
1,266.54
1.14
1.08
1,446.59
1.14
1.08
DCF
339.90
208.22
220.08
232.62
245.87
259.87
274.68
290.32
306.86
324.34
342.82
362.35
382.99
404.81
427.87
452.24
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
10,379.71
Shares outstanding
110.657
45.87
45.87
PV future CF/Shrs outstanding
Current Price
Cost of Equity (Bloomberg)
Cost of Debt (Bloomberg)
WACC (Bloomberg)
5,075.84
8.06%
3.08%
6.68%
Note: Solving for a PV equal to BLL’s current price indicates that FCF must grow by
14.22% annually through 2019 to justify the current stock price.
30
T-Bill Regression: Monthly Data Since 1996
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.837904
R Square
0.70208
Adjusted R Square
0.699219
Standard Error
5.707418
Observations
106
ANOVA
df
Regression
Residual
Total
Intercept
T-bill
Significance F
SS
MS
F
1 7983.762 7983.762 245.0915 4.17E-29
104
3387.76 32.57461
105 11371.52
t Stat
CoefficientsStandard Erro
33.56922 1.227744 27.34219
-4.8344 0.308798 -15.655
P-value
Lower 95% Upper 95% Lower 95.0%Upper 95.0%
2.71E-49 31.13456 36.00389 31.13456 36.00389
4.17E-29 -5.44672
-4.222 -5.44672
-4.222
Crude Regression: Monthly Data Since 1996
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.719406
R Square
0.51755
Adjusted R Square
0.517083
5.702815
Standard Error
Observations
1045
ANOVA
df
Regression
Residual
Total
Intercept
Crude
SS
MS
1 36387.68 36387.68
1043 33920.55
32.5221
1044 70308.23
Coefficientstandard Erro t Stat
-6.40206 0.570607 -11.2197
0.80112
0.02395 33.4494
F
ignificance F
1118.86 2.9E-167
P-value Lower 95%Upper 95% ower 95.0%
Upper 95.0%
1.16E-27 -7.52173 -5.28239 -7.52173 -5.28239
2.9E-167 0.754125 0.848117 0.754125 0.848117
31
T-Bill and Crude Regression: Monthly Data Since 1996
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.933841
R Square
0.87206
Adjusted R Square
0.869575
3.75833
Standard Error
Observations
106
ANOVA
df
Regression
Residual
Total
Intercept
Crude
T-bill
SS
MS
F
Significance F
2 9916.642 4958.321 351.0304 1.03E-46
103
1454.88 14.12505
105 11371.52
CoefficientsStandard Erro
t Stat
14.16374 1.845408 7.675127
0.55976 0.047851 11.6979
-3.5115 0.232673 -15.092
P-value
Lower 95% Upper 95% Lower 95.0%Upper 95.0%
9.79E-12 10.50381 17.82367 10.50381 17.82367
1.28E-20 0.464857
0.65466 0.464857
0.65466
7.57E-28 -3.97296 -3.05006 -3.97296 -3.05006
32