Global packaging industry revenue is expected to rise to $739.9 billion in 2014 at an average annual growth rate of 3.1% from the last five years. Growth in this industry is driven by rising demands from manufacturing and retail sectors.
I have analyzed three packaging companies, which entered the Fortune 500 list of largest corporations of the U.S. last year. These companies have implemented certain strategies which will improve their rankings. These strategic steps include installations of new plants, expanding existing ones, and developments in major revenue generating segments.
Better revenue opportunities from Asia Pacific and Brazil
Globally, volume of beverage cans for Crown Holdings, Inc. (NYSE:CCK) increased 6% year-over-year in the first-quarter of 2013, primarily driven by growth in Asia Pacific and Brazil.
Crown Holdings’ Americas beverage segment revenue increased to 3.4%, year-over-year, in the first-quarter of 2013, primarily due to growth in Brazil. The beverage can market of Brazil grew 10% in 2012, due to carnival season. To strengthen its market in Brazil, Crown Holdings began construction of a new, $1 billion plant in this region. The plant is expecting to commence production in the beginning of next year with 900 million cans annually. In the first-quarter of 2013, the company contracted out around 70% of total plant’s production to three of its customers. Anticipating growth from the new plant, Crown Holdings, Inc. (NYSE:CCK) expects revenue to increase from $349.4 million in 2010 to $533.69 million in 2013 from Brazil.
Net sales in the Asia Pacific market increased by $51 million, year-over-year, to $276 million, in the first-quarter of 2013. Rapid urbanization and emerging middle class are both growth drivers of the beverage industry in Asia Pacific region. Crown Holdings, Inc. (NYSE:CCK) expects continued growing demand from this region, so it announced a new beverage can manufacturing plant in Sihanoukville, Cambodia. The plant will have an initial annual production of 725 million aluminum cans. The facility is expected to start production by the third-quarter of this year. With the increasing demand and production facility, Crown Holdings expects its Asia pacific segment’s earnings to increase from $137 million in 2012 to $166 million in 2013.
The major risk for Crown Holdings, Inc. (NYSE:CCK) comes from foreign currency translation. Approximately, 70% of the company’s sales are from outside the U.S.
Moreover, the company’s core business is metal beverage packaging. Looking at the rise in metal prices, the beverage producers might shift to cheaper alternatives like plastics or glass.
Growth in corrugated and consumer package segment
Rock-Tenn Company (NYSE:RKT)’s corrugated cardboard package segment registered growth in the first quarter of 2013, due to increment in cardboard’s selling price and improved product mix. Its cardboard product mix improves with a higher ratio of high performance cardboard, which have high compressive strength, and white-top cardboard than standard valued cardboard.
The demand for corrugated cardboard, globally, is expected to increase 3.4% annually to reach 213 billion square meters this year. To meet this growing demand, Rock-Tenn Company (NYSE:RKT) is upgrading its existing plants. The company spent $9 million this year for upgrading its high return generating corrugated box plants in Fresno, California and Texas.
Also, in second-quarter of 2013, Rock-Tenn Company (NYSE:RKT) completed its upgrade program with installation of the ‘standard corrugated box system’ in four of its plants. The company expects to complete the installations process of this system in all its corrugated cardboard plants by the fiscal year 2014. These developments have raised Rock-Tenn’s segmental revenue expectations from $6.1 billion in 2012 to $6.7 billion in 2013.
Rock-Tenn Company (NYSE:RKT)’s consumer package segment’s operating income was slightly decreased quarter-over-quarter by $4 million, to $63 million, in the second-quarter of this year. Reduced volume of bleached sulfate paperboard was the prime reason for this declination. Rock-Tenn’s mill in Demopolis manufactures solid bleached sulfate, or SBS, paperboards. The mill’s maintenance outage led to reduction in SBS paperboard volume.
The maintenance outage was a result of the plant’s upgrade program for which production was stopped for precautionary measures. The outage led to a SBS backlog of around 42 days. Rock-Tenn Company (NYSE:RKT) expects growth from the backlog and a hike in the price of SBS. According to Pulp & Paper Week, SBS was priced around $1,100 per ton in February 2013. The April edition reported a hike in SBS prices of $15 per ton. The company expects its consumer package segment’s revenue to rise from $611 million in the first-quarter of 2013 to $655 million in the fourth-quarter of 2013, due to the backlog and rising price of SBS.
The only downside for this segment is the price risk of SBS paperboard. If the price of paperboards decrease, then the company will observe a decline in its revenue. However, seeing the current scenario, the possibility the same to happen is weaker.
Expansion plan in Brazil to partially offset losses from European region
Ball Corporation (NYSE:BLL)’s can plant in Alagoinhas, reported a rise in sales volume to 40% year-over-year, in the first-quarter of this year in Brazil. This beverage can plant started production in March 2012. And with the growth in the Brazil’s can market by 10% last year, the company expanded the Alagoinhas plant.
Recently, Ball Corporation (NYSE:BLL) started installation of a second production line, to be operational by the end of 2013. Total investment is expected to be around $140 million. The upcoming FIFA World Cup 2014 will boost beer volumes in Brazil. Around 60,000 people are expected to come for the event. The government has allowed alcohol consumption in the stadium, which will further increase beer sales. Moreover, Ball Corporation is one of the major can suppliers to Coca Cola. Coca Cola is the official partner of FIFA World Cup. Rise in Coca Cola volumes and growth in beer demand during the World Cup will boost the expansion plan in Brazil.
However, the company’s may face headwinds in the Brazilian market due to its competitors, which are also targeting the event. This may lead to the lower growth rate in company’s Brazil segment and may also hamper the rate of production from the expanded Alagoinhas plant. Ignoring the risk factor, the Americas/Asia beverage segment expects EBIT to grow from $522 million in 2012 to $552 million in 2014.
Ball reported a loss in the first-quarter of 2013 due to European beverage headwinds. The revenue from the European beverage market of Ball Corporation (NYSE:BLL) went down by $251 million to $1.767 billion in 2012. This decline was attributed to decreasing demand for beer in Europe and higher operational cost. The beverage demand in Europe decreased due to harsh and long cold weather. Ball Corporation suffered from higher costs attributed to operational setbacks it faced on moving its regional office from Germany to Zurich, Switzerland. Europe headwinds are expected to continue for a longer term because of changing government regulations regarding budget, price hikes, and higher unemployment rate. Due to these, the Europe beverage segment sales of the company are further expected to decrease from 3.4% in 2012 to 2.0% in 2014.
Conclusion
Crown Holdings, Inc. (NYSE:CCK) expects growth from the Asia Pacific market due to its new beverage plant in Sihanoukville, Cambodia. The Americas segment also expects growth from a new plant in Brazil. Looking at the growth prospects, I recommend a buy for this stock.
Rock-Tenn saw growth in its corrugated package segment and consumer package segment. With growth expected in both segments, I recommend a buy for this stock.
Ball Corporation (NYSE:BLL) registered a loss in its European market due to reduction in beverage demand and declining economy. These losses were partially offset by growth in Brazil due to its can manufacturing plant in Alagoinhas. Hence, I recommend holding the stock until new growth announcements are made.
Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of Rock-Tenn Company.
The article 3 Packaging Companies You’ve Never Heard Of originally appeared on Fool.com.
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