Write-up by Mister Compounder
The 3 most important variables to the Ball (BLL) investment thesis are:
- The industry structure and the symbiotic relationship with beverage companies, that naturally leads to “survival of the fattest”.
- The EVA approach that links interesting site economics to the creation of shareholder value.
- Credit risk (having the right level of debt).
Ball is one of the world’s leading suppliers of metal packaging to the beverage and food industry. The company has a long history and was founded in 1880. Through its entire history, Ball has been involved in close to fifty different segments. Today, the business is mainly based on delivering aluminum beverage containers to the beverage industry. The company’s business is about delivering aluminum cans to large consumer staple companies like: Coca Cola, Unilever and AB InBev.
This sounds like a really dull, capital intensive and boring business. So, why should it interest you?
Interesting Site Economics
The source of Ball´s competitive advantage is dependent on local scale and switching costs, resting on a highly consolidated industry among both producers and customers. The plants making the beverage container cans are huge. This is best illustrated by the size range of the production plants from about 100,000 square feet to around 700,000 square feet. The company’s largest site is the Findlay, Ohio plant (733,000 square feet) that produces both beverage cans containers and food containers.
To get an understanding of the underlying unit economics driving both revenue and profitability at Ball, it might be interesting to do some guesstimates on the profitability of the site locations.
In the North American segment, the beverage container industry represents about 110 billion units, where five companies dominate the market in the U.S, Canada and Mexico. For fiscal year of 2017, Ball produced 46 billion units, hitting a market share of 42%. This volume is served by 19 plants in the US, 1 in Canada and 2 in Mexico. They have also one joint venture production facility, but I have not included that one in this calculation. In total 22 plants, which means an average of 2.1 billion units per plant per year.
This means that – each year – the typical Ball plant should make:
- 1 billion units
- $190 million in revenues
- $37 million in gross profit at a 19.5% gross profit margin
- $25 million in operating profit at a 13% operating margin
- Which is: $624 of revenue per square foot in and $81 in profit per square foot
Ball typically generates 9 cents in revenues per beverage can and 1.2 cents in operating profit per can. This is what generates sales and earnings at Ball. In other words, these are huge operations. Just like with distributors, it will be difficult to compete with a fully functioning and operative production plant. Given this, it is highly unlikely that a competitor would add excess capacity near an existing plant. It leads naturally to local markets as it does not make sense to transport the products …Read more