OI - Owens Illinois

[Guest JoelS]

Owens Illinois (OI): US $14.06

Market cap: $2.26bn

 

An idea found in Alex Roepers stock portfolio (21% position). A pretty astute manager with a great track record in his US fund. He takes a differentiated approach which may explain his returns. His area is niche industrial businesses that don't suffer from obsolescence or tech change. They tend to throw off a lot of free cash flow and benefit from scale. Roepers' average entry price for OI is over $25, so the decline in the stock and his level of concentration made me wonder what he saw in it.

 

More on his approach here: http://www.atlanticinvestment.net/documents/FG/atlantic/PressCoverage/215546_Graham__Doddsville_-_Alex_Roepers.pdf

 

Owens is the largest glass bottle manufacturer in the world. They've had a bad few years and the sentiment is low, but they still managed to generate $2 in EPS and FCF of $210m in 2015 (9% FCF yield). In 2016 the figures should look something like this:

 

Ebitda: $1.45bn

Operating cash flow: $730m

Capex: $450m

FCF: $280m

The net debt is $5.5bn and they expect to pay interest of $275m in 2016.

 

This makes the forward FCF multiple 12% and the forward EV/EBITDA 5.4x. One thing I like about Owens is the exposure to sales outside the USA. If the USD falls at some point, people will probably get all excited for companies that have overseas operations. They're being unfairly punished for a high USD now, and there's a good chance they'll be unfairly rewarded if the USD falls.

 

I guess OI is a simple story of durable cash flows, a fairly low multiple of depressed FCF, and mean reversion. Doesn't look like a long term compounder, but I liked it enough to take a small tracking position. The high debt is a worry if there are cockroaches under the sink. There's an investor day in March which should provide more info.

 

Anyone an investor in OI or willing to share their thoughts?

 

Further links:

1. Roepers letter to the board expressing displeasure: http://www.sec.gov/Archives/edgar/data/812074/000090571814000806/exhibit1.htm

2. Cool video of how glass is made & company history:

3. Yep time is running out for OI

http://www.wsj.com/articles/is-time-running-out-for-bottle-maker-owens-illinois-1428689364

4. Barrons article: http://www.atlanticinvestment.net/documents/FG/atlantic/PressCoverage/426120_2015_08_15_Barrons_-_Owens-Illinois_Glass_Half_Full.pdf

5. WSJ on OI acquisition in May 2015:

http://www.atlanticinvestment.net/documents/FG/atlantic/PressCoverage/373183_2015_05_13_WSJ_-_Owens-Illinois_Bets_on_Mexico_for_Growth.pdf

[Spekulatius]

Besides the substantial debt load, OI has a significant asbestos liability. They have averaged an out $150M in cash expense/ year, but this year had to put in $225M in the fund for future expenses.

 

This is an ongoing expense that substantially lowers OI FCF and needs to be considered. If one considers a $200M in annual asbestos expense, OI is not cheap at all.

[Guest JoelS]

Spek,

 

You are right, OI went from a 3 year to a 4 year liability which increased the total liability but reduced the annual asbestos charge.

 

from the Q4 release:

"In the fourth quarter, the Company recorded a charge of $225 million to increase its accrued liability for asbestos-related costs. This charge is equivalent to an average annual charge of $112.5 million, which is substantially lower than the $135 million charge recorded in 2014."

 

You are also right that the asbestos liability detracts from FCF but this has been declining with the average age of claimants now over 80. For reference, the FCF in 2014 and 2013 was $330 and $340.

 

http://phx.corporate-ir.net/External.File?t=1&item=VHlwZT0yfFBhcmVudElEPTUyMTQxNDR8Q2hpbGRJRD02MDg4NzY=