Crown Earnings: Cost Management Drives Margin Growth Despite Pressured Volume; Shares Attractive

Narrow-moat-rated Crown Holdings CCK reported third-quarter results that were largely in line with our expectations. Net sales fell roughly 6% year over year as Crown continued to navigate softening beverage can demand in Asia and weakness in its transit packaging business. However, recovering demand in North America and Europe buoyed Crown’s volume in the quarter, and inflationary pass-throughs from 2022 drove a 310-basis point increase in operating margin year over year. We’ve decreased our fair value estimate to $96 per share from $97 to reflect lower near-term revenue in our forecast.

The Americas beverage business performed well in the quarter as net sales slid 1% year over year but segment operating margin reached almost 18%, representing a roughly 400-basis-point increase from a year ago. Customer demand remains resilient in the region despite inflationary pressures and heightened economic uncertainty, and we expect relative strength in North America through the end of the year. The European beverage business continues to make gradual improvements following a difficult 2022. Net sales in the segment decreased 3% year over year despite a 5% decline in volume as the region still faces some demand headwinds. While the European business will likely see volume pressures through the remainder of the year, we expect demand to rebound in 2024.

Despite unfavorable macroeconomic dynamics, cost-reduction initiatives and pricing actions continue to bear fruit in Crown’s transit packaging business. Revenue decreased 9% year over year but segment operating margin came in at 16.1%, an impressive 380-basis-point improvement from a year ago. The transit packaging business is much more cyclical than Crown’s core beverage can business, so its current pullback is not surprising. Still, we are impressed by Crown’s cost management and price increases during this time and expect the segment to provide a runway for growth when demand recovers.