This Can Runneth Over
By Sam Stovall
It seems like a good time to look at one of the groups that has been on our list of industries with top Standard & Poor's for a while -- metal and glass containers. It has been on a tear in 2002: Through May 31, the S&P Metal & Glass Containers index has advanced 21.1% year-to-date, vs. a 5.9% decline in the S&P 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600).
More good things should be in store. Even after the recent rise, Standard & Poor's analyst Stewart Scharf is maintaining his positive investment outlook on the group. He thinks the gradual economic recovery in the U.S. -- and increased seasonal demand for beverage cans and bottles -- will aid results for the industry's companies.
CAN'T BE CONTAINED.
In their search for ways to boost growth, says Scharf, some container companies have begun to target emerging markets such as China, Eastern Europe, Russia, and Latin America, many of which are still developing the use of disposable containers. (However, Ball Corp., a major industry player, sold its underperforming general-line can business in China in August, 2001.)
Meanwhile, North American markets have been hurt by excess production capacity and slow population growth, although capacity utilization has shown some recent improvement. Scharf believes a shift in focus to more vibrant foreign markets will translate into solid long-term results.
Another strategy that could spur growth and boost profits is the development of new product categories. One example: the industry's transition toward newer types of containers, including the popular polyethylene terephthalate (PET, sometimes called "polyester") plastic bottles, which could become a new beverage industry standard, says Scharf.
He says industry consolidation is also likely to aid container companies' operating margins, as fewer -- but larger -- players benefit from greater economies of scale, lower overhead costs, and more leverage in materials purchasing. And as the economy recovers, the need for additional manufacturing capacity should lead to the expansion of facilities in the U.S. and abroad.
What companies does Scharf like? His top pick, ranked 5 STARS (buy), is Pactiv (PTV ), which accounts for around 46% of the S&P Metal & Glass Containers index's market cap. Scharf says Pactiv should benefit from its strong brand names -- such as Hefty -- new products, and operational improvements at its protective-packaging business, following a restructuring.
His other top pick in the group, ranked 4 STARS (accumulate), is Ball (BLL ), which accounts for 32% of the index's market value. Scharf expects Ball to benefit from improvements at its metal food-packaging segment, a new joint venture with Coors that will add 4.5 billion beverage cans to its annual production, and strategic acquisitions.
S&P Relative Strength Rankings
These industries carry 12-month relative strength rankings of "5" as of May 31, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).
Stovall is chief sector strategist for Standard & Poor's