Crown Holdings

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Crown Holdings is a leading global supplier of rigid packaging products, primarily for consumer goods, with operations in North America, Europe, and the Asia Pacific. It makes a variety of metal and glass packaging products including cans, bottles, and aerosol containers.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Crown Holdings’ business is primarily related to providing packaging for consumer goods with about 80% of the revenues derived from beverages.

Business Overview:

  • Revenue Distribution:
    • The company operates through four segments, with American Beverage being the largest, followed by European Beverage, Asia Pacific, and Transit Packaging.
  • American Beverage is concentrated in North America, and consists of beverage cans.
  • European Beverage manufactures beverage cans and ends in Europe, the Middle East and North Africa.
  • Asia Pacific produces beverage cans in various Asian countries.

  • Transit Packaging makes and sells industrial, protective, and specialty packaging solutions including steel and plastic straps.

  • Industry Trends:
  • The global packaging industry is highly competitive and subject to fluctuations in raw material prices, particularly aluminum and steel.
  • There’s a trend towards sustainable packaging solutions, which is a major focus of Crown. They’ve committed to 90% sustainable sourcing by 2030 and a 20% reduction in greenhouse emissions by the same year.
  • Consolidation in the beverage industry is a significant factor affecting the customer base.
  • Emerging markets offer strong growth potential for the beverage industry.

  • A focus on innovative packaging technology is very important to stay competitive.

  • Margins:
    • Crown Holdings’ operating margins have historically been good but have also shown volatility. Profit margins are impacted by input costs, pricing pressures from competition and changes in demand, specially due to inflation that has been rising.
    • The company has a strong focus on improving efficiencies and controlling costs, but they are still somewhat volatile, as shown in its recent reports, which also mentions that margins may not improve much, since the market is also pricing them as such.
  • Competitive Landscape:
    • The packaging industry is competitive, with numerous domestic and international players and a few major players like Ball Corp. and Ardagh Group that dominate some geographies or sectors.
    • Competition is based on price, quality, service, innovation, customer relationships, speed of delivery, and the ability to create innovative and more sustainable products and packaging.
  • Crown focuses on its globalized operations.
  • What Makes CCK Different:
    • The company has a focus on high-end packaging and sustainable solutions.
  • It has a strong focus on innovation, with recent initiatives including using recycled aluminum and bio-based raw materials in the production process.
  • It also has a strong geographic diversity, which insulates from regional changes in demand or prices.

Crown’s focus on sustainability and technological innovation could create more value for the company in the coming years by having the ability to reduce costs, have pricing power by using more environmentally friendly processes and materials, and by getting higher customer demands due to a better brand image.

Financials:

  • Revenue: Net sales for the nine months ended September 30, 2023 was $8,495.2 million. Net sales for the three months ended September 30, 2023 was $2,893.4 million.
  • Operating Income: Net income for the nine months ended September 30, 2023 was -$17.2 million. Operating income for the three months ended September 30, 2023 was $133.5 million.
  • Earnings per share: Earnings per share attributable to Crown Holdings for the nine months ended September 30, 2023, was -$1.47. Earnings per share attributable to Crown Holdings for the three months ended September 30, 2023, was $0.56.
  • Profitability: Despite the scale, CCK’s profitability is impacted by fluctuations in input prices and is not always consistent and reliable.
  • While there’s a trend of improved earnings, they can still be volatile.
  • Debt: The company has a large debt load of $6.7 Billion, mainly from borrowings and loans. The company is actively trying to reduce its debt, by using cash from operations.
    • This has led to an increasing long term debt, even though its operating cash flow is positive.
  • Cash Flow: the cash flows from operations are fairly consistent, despite volatile revenues, meaning that the company can mostly sustain its operations, and debt payments.
  • Capital Expenditure: CAPEX is slightly variable due to different factors.

Recent Concerns/Controversies and Management Response: * There is an ongoing legal battle regarding some claims relating to asbestos production, but as of now, the company believes that they have no legal liability.

  • The company is facing macroeconomic headwinds, such as inflation and higher interest rates. It has passed costs to customers, which has affected volume growth. However, there has been some slowdown in volume for their Transit Packaging segment.
  • The company has taken on a more conservative financial approach, reducing debt and repurchasing company shares to improve shareholder value.
  • They are implementing a new strategic plan in Asia, focusing on profitability rather than growth.
  • They also aim to reduce manufacturing waste.
  • The company is focused on increasing the use of recycled aluminum in manufacturing, which will potentially offset the impact of raw materials prices, and lower their CO2 impact.
  • The company has been affected by the strong dollar, as it translated into lower revenues and earnings, but the company is implementing strategies to minimize this effect.

A major focus area for management is cost-cutting and restructuring their operations to improve profit margins. The company is also focusing on long-term growth initiatives with a focus on sustainability and innovation.

Moat Rating:

  • Rating: 3/5 - Narrow Moat
  • Justification:
    • CCK’s moat is somewhat complex, having elements of scale-based cost advantages and to a lesser extent, customer switching costs and intangible assets (brands).
  • Their distribution network is vast, having multiple plants around the world, which could provide scale economies and logistics advantages against new and smaller companies.
  • They also have a fairly strong and established customer base, with the biggest beverage manufacturers, so it is likely that they have better pricing power than a small company.
  • They have a lot of brand names in the metal packaging business, such as “Peel”, which also provides a little bit of brand power.
  • However, they are susceptible to the cyclical nature of the industry and price competition. Although the scale may provide a good moat, the commodity and cyclical nature of the market makes the moat quite narrow and potentially susceptible to changes.
  • There is no strong pricing power against large customers like Anheuser-Busch.
  • There is no technological advantage or strong barrier that would prevent new or existing entrants from competing efficiently, and margins depend on the industry cycles and capacity availability.

Risks to the Moat and Business Resilience:

  • Raw material prices:
    • The company is highly dependent on the prices of raw materials, particularly aluminum and steel, which can increase their costs and squeeze margins if they can’t raise prices. Although they try to hedge the risks, the volatility could still greatly affect their operations.

  • A sustained increase in commodity prices can erode their pricing power since they will not be able to fully pass costs to the customers.

  • Competition:
    • The industry is highly competitive, with many manufacturers of different sizes, with strong players like Ball and Ardagh Group, that could bring pricing pressures and lower margins if demand falls.
  • There are many players from all over the world and in different price ranges, with most competitors also being very close to the client locations, therefore making price sensitivity a high factor for the industry.
  • Customer Concentration:
    • The company’s customer base is somewhat concentrated, with large beverage and food manufacturers accounting for a large portion of its revenues. This exposes them to the risk of losing business from one or two big customers.
  • These customers have a large bargaining power due to their scale, and their ability to leverage competitors.
  • Currency fluctuations: They may be susceptible to large currency fluctuations, since their business is spread globally. These changes may hurt their financials, and can be challenging to manage.
  • Economic Cyclicality: The company is vulnerable to economic downturns because demand for packaging for many goods is greatly affected by those events. In bad times, sales and profits may dramatically decrease.
  • Technological disruption: The industry could be susceptible to disruptive technologies that allow new materials to be more efficient, or some other way to create packaging products more easily, quickly, and for lower costs.

Business Understandability:

  • Rating: 3/5
  • Justification:
    • CCK’s core business of manufacturing packaging products is simple to grasp. But understanding the underlying operations is a complex and global undertaking with some technical aspects of manufacturing and financials and global risks.
    • Its complex financial statements and the need to understand accounting adjustments are more difficult than a simple, stable, business that makes consumer products like soap or candy.
    • Newcomers to the business and its financials would take some time to understand all of its moving parts and the subtle nuances.

Balance Sheet Health:

  • Rating: 3/5
  • Justification:
    • CCK has a high level of debt, which is a risk factor. However, they have been lowering the total amount, and focusing on repurchasing stock, showing a willingness to return cash to investors.
  • Their short-term assets are reasonable, but not as high as to warrant a high credit rating.
  • They have a quite large amount of goodwill and intangibles which are generally created by the M&A process.
  • The company generates significant amounts of cash, and can be profitable. This enables them to honor debt payments and even repurchase stock.