Under-the-Radar Stock Drives Beverage Industry

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Tim Begany

NEW YORK ( StreetAuthority) -- To make money in stocks, some investors prefer to "fly under the radar," holding shares of companies that operate in the background by helping big-name firms do what they do best.

One reason I like these "behind-the scenes" companies is they don't get nearly as much press as such well-known stocks as Microsoft ( MSFT), Wal-Mart ( WMT) and General Electric ( GE), so they may be less prone to price behavior related mainly to investor sentiment and speculation.

One of my favorites provides an essential product -- aluminum cans -- to several top beverage companies including Anheuser-Busch InBev ( BUD), Pepsico ( PEP) Coca-Cola ( KO). It also makes metal food cans, aerosol cans and metal jar tops. In fact, it's the world's largest producer of metal packaging, though I doubt many consumers or investors would know it, probably because most care a lot more about what's in a beverage can than about who made the can.

Pepsi

The company I'm referring to is Crown Holdings ( CCK), and if it's not a great behind-the-scenes stock, then I don't know what is.

Crown is an excellent investment because it's a firmly entrenched leader in the metal-packaging oligopoly of North America, Europe and Brazil, where competition is limited to a few other key players such as Ball ( BLL) and Silgan Holdings ( SLGN). This concentrated market structure allows Crown (and its peers) to charge higher prices because customers can't seek discounts elsewhere. Powerful new competitors are unlikely to appear anytime soon, particularly in the mature North American and European markets, where new manufacturing facilities are costly.

Twenty-eight percent of Crown's $8.5 billion in revenue comes from North America (mainly the United States), 47% comes from Europe and 25% comes from emerging markets. However, these proportions are likely to shift more and more in favor of emerging markets, since demand in those regions is growing fast while North America and Europe are holding steady. Metal packaging, currently a $59.8-billion-a-year industry, is projected to grow to $165.4 billion by 2021, mainly on rising demand in emerging markets.

To grab its share of the growth, Crown is stepping up operations globally, but especially in China, where demand for metal packaging is especially strong. On Oct. 7, for example, the company opened an aluminum can plant in Hangzhou, a city in the Zhejiang Province of Eastern China. The plant, which is expected to have an initial production capacity of 700 million cans per year, is Crown's fifth beverage can plant in China. Existing facilities are located in Bejing, Foshan, Huizhou and Shanghai. Crown now controls 20% of China's metal-packaging market, placing it at the top in Chinese market share along with Ball.

Besides being dominant and in demand, Crown is a low-cost producer. In its beverage can segment, for example, which accounts for 50% of revenue, costs are contained through long-term sales contracts that shift aluminum price increases to customers. Operating margins in this segment have historically been strong - 13% to 14% for the past several years, despite a sour global economy.

Risks to Consider: Because Crown's products compete with glass and plastic containers, substitution is an important risk to consider when owning this stock. For instance, beer drinkers have been increasingly shifting to products packaged in glass bottles rather than aluminum cans. As a result, about half of all beers are now sold in bottles, compared with around 40% a decade ago.

Action to Take. I don't see substitution becoming a significant problem for at least the short-to-intermediate term (and maybe not at all). Analysts project earnings growth averaging 13.5% for the next three to five years, very brisk despite being quite a bit slower than the 34% growth rate of the prior five years. Sales are expected to expand 5.5% a year, a noticeable improvement compared with the 4% growth rate Crown posted during the previous five years.

Based on these projections, I believe the stock is capable of reaching about $65 per share in as little as three years. At that rate of growth, by the end of 2014 you'd be looking at a bit more than a double from the current price of about $32 a share. This is assuming analysts are right about earnings growing 13.5% a year, which would put earnings at $4.32 a share at the end of 2014, and that investors continue to pay at least 15 times earnings for the stock as they have for the past couple years (15 X $4.32 = $64.80 per share).

Beyond that, it's much more difficult to say. The big question is whether Crown will turn out to be a stock for the long haul, or if competition from glass and plastic substitutes will begin to erode earnings to the point the stock loses the market-beating upside potential it has now. If you plan to buy the stock, then keep an eye on this and be ready to jettison shares if this scenario materializes.

Disclosure: T. Begany and/or StreetAuthority, LLC hold a position in PEP.

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  • This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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