Crown Holdings (CCK) disclosed in its first-quarter 10-Q filing that it now expects to incur a loss related to a 2015 German investigation into anticompetitive pricing. German investigators have now handed over control of the case to the European Commission after finding evidence of wrongdoing. Crown’s shares have fallen more than 5% since the May 2 filing, in contrast to rival Ball’s (BLL) shares, which have remained steady. This reaction appears to overestimate the severity of the fine that we expect to be imposed on Crown, and we are maintaining our $59 fair value estimate. With the shares trading nearly 25% below our fair value estimate, we think long-term investors could take advantage of an attractive entry point in this narrow-moat company.
Our fair value estimate assumes a $25.3 million fine following a review of European cartel laws, applicable fines, and Crown’s disclosures to date. The case includes an investigation into German, U.K., and French operations, limited in scope to food cans. Based on Crown’s disclosures, the company turned over evidence of wrongdoing by German employees within six months of the investigation in 2015, and the case cites a duration of “several years.” In our base- and bull-case scenarios, we assume that only 2013-15 German revenue is exposed to fines by the European Commission. We also expect that Crown’s early cooperation will qualify the company for a 25%-40% fine reduction under the European Commission’s cartel leniency policy. Before leniency, the assessed sales penalty rate is 7% in our base case and 5% in our bull case.
Charles Gross does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.