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Stock Strategist

This Packaging Firm Makes a Canny Choice

Rexam's exit from plastics allows it to focus on its advantaged beverage-can operations.

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After the sale of its plastic packaging businesses,  Rexam (REXMD) is now fully focused on its metal beverage-can operations. We're pleased to see this, because beverage-can production has clearly been Rexam's most-advantaged business. Together, the world's three largest producers of metal beverage cans constitute nearly the entire share of the European, South American, and North American beverage-can markets and 60% of global supply. Thanks to the rational oligopolies that exist in most major markets, Rexam's beverage-can operations have largely been able to maintain steady operating margins as a result of its long-term contracts, most of which allow Rexam to pass through what are often volatile input costs (mainly aluminum and steel) to its customers. Contracts tend to be at least three years long and normally include annual supply targets. Its top customers include multinational beverage companies such as  PepsiCo (PEP) ,  Coca-Cola (KO),  Anheuser-Busch Inbev (BUD), and  Heineken (HEINY), which provide steady demand and help Rexam run its facilities at very high utilization rates.

Rexam has more than 60 beverage-can plants in 24 countries and holds a dominant share of the European and Brazilian markets. Transporting empty cans more than 300 miles is expensive, so having a plant near a customer's operations helps keep costs down and allows the can manufacturers to offer lower prices. Beverage-can manufacturers also benefit from ongoing customer demand for product differentiation on store shelves, such as higher-margin specialty cans (non-12-ounce/33-centiliter cans) and energy drink cans. Rexam is the sole manufacturer of cans for Red Bull energy drinks, for example, which grew from 1.9 billion cans sold in 2004 to 5.4 billion in 2013. Indeed, Rexam is increasing its specialty-can capacity in Europe primarily to serve this rapidly growing customer. Rexam's specialty-can mix is approximately one-third of production in Europe and about 25% in both North and South America. Over the next few years, we expect these figures to move closer to 40% as more than half of Rexam's planned capacity additions are for specialty cans.

Todd Wenning does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.