O-I Glass Earnings: Normalizing Glass Container Demand Weighs on Volumes, but Shares Remain Cheap

Narrow-moat-rated O-I Glass OI reported second-quarter results that were in line with our expectations. Like many other packaging companies, O-I’s quarter was negatively affected by customer destocking and normalizing consumer demand. Nevertheless, O-I reported a 6% increase in revenue year over year, as a 9% decline in volume was more than offset by a 13% increase in selling prices. Even with its robust pricing gains, O-I faces a challenging second half of the year amid inventory-management initiatives and constrained beverage demand. As such, we’ve decreased our fair value estimate to $28 per share from $30 due to lower near-term profitability in our forecast.

The Americas segment experienced significant challenges in the second quarter amid weak retail demand and additional inventory destocking by customers. During the quarter, O-I temporarily curtailed production to offset declines in volumes, which were down roughly 9% from a year ago. With this decline in volume, the segment reported a 12.7% operating margin, which was roughly 70 basis points lower than a year ago. This was primarily due to higher operating costs because of the curtailments but partially offset by higher selling prices in the quarter. We expect volume trends in the Americas segment to persist through the end of the year, but favorable pricing should provide some relief.

O-I’s European business posted strong results in the second quarter as revenue increased 13% year over year despite an 11% decrease in volume. Additionally, it reported an impressive 23% operating margin as supply remained constrained in the region. The supply of glass bottles in Europe has been constrained for over a year by the ongoing war in Ukraine, as Europe historically imported glass from both Russia and Ukraine. The limited supply of glass has led to robust price growth in the region, but O-I and other glass producers have begun building capacity in Europe to offset the lower supply.