Ball Earnings: Margins Remain Resilient Despite Continued Volume Declines

Narrow-moat rated Ball BALL reported underwhelming but somewhat expected second quarter results as demand remained constrained across many of its end markets. Net sales tumbled almost 14% as all three beverage segments saw double-digit declines in the quarter. Persistent inventory destocking and normalizing consumer demand continue weigh on Ball’s operating results. We maintain our view that Ball will benefit from a long-term shift to eco-friendly packaging, but demand headwinds are likely to weigh on beverage can volumes through the end of the year. We’ve decreased our fair value estimate to $55 from $59 per share due to lower near-term revenue in our forecast.

Ball’s North and Central America beverage packaging business posted mixed results in the quarter as revenue fell almost 14% but segment operating margins expanded over 200 basis points from a year ago to 11.4%. Normalizing consumer demand, inventory destocking, and the effect of declining beer sales for Anheuser-Busch led to a roughly 8% decline in volume. Management noted that downtime taken earlier in the year helped rightsize inventory levels and expects volume improvements in the second half of the year. We remain confident that despite near-term demand pressure, Ball’s beverage can businesses are well positioned to capitalize on long-term growth for eco-friendly packaging.

Ball’s aerospace business continued to perform well, with revenue increasing 2% year over year and operating margins expanding 350 basis points. Contracted backlogs came in at $2.6 billion, while won-not-booked backlogs reached $6 billion as end-market demand remained strong. Management noted that the strength of the aerospace segment led to its recent decision to pursue a potential sale of the business. We think this would be a sound strategic move that would enable Ball to focus more resources on its robust beverage can operations while capitalizing on seemingly strong market interest in its aerospace business.