CFA Institute Research Challenge
Ball Corporation
Will Foster, Lauren Friesen, Gavin Parsons, Mushfiqur Rahman, Ni Yan
7 January 2013
Ball Corporation (BLL)
• Rating: HOLD
• Current Price: $46.09 (January 7, 2013)
• One-Year Price Target: $46.00
• Sector: Industrials
• Industry: Paper and Packaging
Investment Summary
Financial Summary
Forecast Summary
Net Sales (M)
EBITDA (M)
Net Income (M)
EPS
Free Cash Flow (M)
2011A
$
8,631 $
1168
444
2.63
468
2012E
2013E
8,724 $
9,283 $
1146
1244
464
501
3.02
3.37
558
532
2014E
2015E
2016E
9,879 $
10,522 $
11,203
1327
1416
1511
538
582
632
3.75
4.21
4.74
572
613
661
Business Description
Segments
Source: BLL
Source: BLL
Source: BLL Filings
Growth Strategy
Industry Maturity and
Consolidation
Industry Overview &
Investment Considerations
Aluminum Prices
Source: Bloomberg
Beer Can Shipments
Soft Drink Can Shipments
Total Can Shipments
Sales by Region
Beer Can Shipments Ex-US
Aerospace
Financial Analysis
BALL v. S&P 500 and Industry
Revenue Growth
Operating Margins
EPS Growth Projections
Strong Balance Sheet
Source: Company Filling
Cash Flows
BLL Corp.: Projected Free Cash Flows
(in millions of dollars)
Year
Net Income to Ball Corp.
+ Depreciation and Amortization
+ After-Tax Interest Expense
- Increase in Current Assets
+ Increase in Current Liabilities
- Increase in Cap Ex
Free Cash Flow
2010A
$
$
2011A
468.00 $ 444.00 $
265.50
301.10
107.57
127.51
(474.10)
(54.90)
152.80
137.50
(364.70)
(518.30)
155.07 $ 436.91 $
2012E
2013E
464.18 $ 500.68 $
300.00
317.86
127.44
146.52
(39.56)
(125.03)
35.06
92.41
(346.54)
(419.49)
540.57 $ 512.96 $
2014E
537.77 $
337.00
153.51
(133.43)
98.62
(442.60)
550.86 $
2015E
581.73 $
357.57
156.84
(143.93)
106.38
(468.94)
589.65 $
2016E
632.06
379.32
156.40
(152.46)
112.69
(493.60)
634.40
Valuation
Cost of Equity
Discounted Cash Flow Models
Discounted Cash Flow Valuations
2012E
2013E
2014E
Projected FCFE
NI
$
+ Dep/Amort
$
300.00
- ∆WC
- CapEx
+ Net Borrowing
FCFE
464.18
$
500.68
$
537.77
2015E
$
581.73
2016E
$
632.06
317.86
337.00
357.57
379.32
(4.50)
(32.62)
(34.81)
(37.55)
(39.77)
(346.54)
(419.49)
(442.60)
(468.94)
(493.60)
666.30
219.59
140.47
54.05
1,079.43
$
586.03
$
537.83
Terminal Value
$
486.86
6.72
$
484.73
$
8,240.36
$
484.73
PV of FCF
$
2,690.63
Terminal CF
PV of TV
$
5,608.25
LT growth
2.00%
Equity Value
$
8,298.88
Ke High Growth
6.77%
Ke Stable Growth
8.00%
Shares Outstanding
Est. Price Per Share
153.8
$
53.96
Relative Valuation
Relative Muliple Valuation
10 Yr Forward PE (Source: Bloomberg):
7 Yr Forward EV/EBITDA (Source: Bloomberg):
Est. Price based on PE:
2013 EPS [Estimate]:
Est. Price:
$
$
3.37
45.54
Est. Price based on EV/EBITDA:
2013 EBITDA [Estimate]:
2013 Debt [Estiamte]:
2013 Cash [Estimate]:
Est. Price:
$
$
$
$
1,243.56
3,583.28
218.20
37.95
13.50x
7.40x
Cumulative Valuation
Valuation
FCFE
PE
EV/EBITDA
Target Price Calculation
Price
Equal Weights
$
53.96
33%
$
45.54
33%
$
37.95
33%
$
45.82
Sensitivity Analysis
Sensitivity Analysis
Investment Risk
Major Investment Risks
Conclusion
Conclusion
• Rating: HOLD
• Current Price: $46.09 (January 7, 2013)
• One-Year Price Target: $46.00
• Strong Free Cash Flow and Proven
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Management
Developed Market Pressure
Emerging Market Competition
Full Valuation
Q&A
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Ball Corporation (BLL)
Financial Summary
Segments
Growth Strategy
Industry Maturity and Consolidation
Aluminum Prices
Beer Can Shipments
Soft Drink Can Shipments
Total Can Shipments
Sales by Region
Beer Can Shipments Ex-US
Aerospace
Sales by Region
Can Shipments
Ball v. S&P
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Revenue Growth
Operating Margins
EPS Growth Projections
Strong Balance Sheet
Cash Flows
Cost of Equity
Discounted Cash Flow Models
Relative Valuation
Cumulative Valuation
Sensitivity Analysis
Sensitivity Analysis
Major Investment Risks
Conclusion
Q&A (Con’t)
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Plant Locations in Europe
Europe Can Shipments
Estimated World Population
Soda Consumption
Coca Cola Historical Volume
Metal Beverage Packaging Sales
Geo. Metal Beverage Packaging
Trailing Total Returns
Insider Trading
Ball’s US Sales
Ball’s Foreign Sales
Market Share
Can Shipments
Pro Forma Assumptions
Pro Forma Income Statement
Pro Forma Balance Sheet
Pro Forma Statement of Cash
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Ratio Analysis
Residual Income Rationale
Plant Locations
Ball’s Plants Worldwide
Value Creation Model
Regional Premiums
Historical Forward PE
Historical Forward EV/EBITDA
Environmental Impacts
WACC
FCFF Model
Option Pricing Model
Residual Income Model
EVA
Plant Locations in Europe
Europe Can Shipments
Estimated World Population
Soda Consumption
Coca Cola Historical Volume
Metal Beverage Packaging Sales
Source: Company filings
Geo. Metal Beverage Packaging
Trailing Total Returns
Insider Trading
Ball’s US Sales
Beverage
Ball’s Foreign Sales
Market Share
Source: Company Filings
Can Shipments
Pro Forma Assumptions
Assumptions:
Annual Sales Growth:
Operating Margin
SG&A/Sales Ratio:
Share Buy-Backs
Net Fixed Asset/Sales Ratio:
Cash/Sales Ratio:
Accounts Receivable/Sales Ratio:
Inventory/Sales Ratio:
Accounts Payable/Sales Ratio:
Accruals/Sales Ratio:
Interest rate:
Tax Rate:
Goodwill/PPE,Net
Intangible Asset/Sales:
Other Assets/Sales:
Notes Payable/Sales:
Treasury Stock:
==>
==>
4.6%
3.5%
==>
2.35%
8.8%
13.6%
9.2%
3.1%
==>
28.0%
50%
5.65%
4.48%
2.11%
==>
2012E
1.08%
9.69%
2013E
6.40%
9.97%
2014E
6.42%
10.02%
2015E
6.51%
10.06%
2016E
6.47%
10.10%
26.50%
26.000%
25.500%
25.000%
24.500%
6.15%
6.05%
5.95%
5.85%
5.75%
$500
$450
$400
$350
$350
Source: DU Estimates
Pro Forma Income Statement
BLL Corp.: Income Statements for Fiscal Years Ending December 31
(in millions of dollars)
Year
2009A
2010A
Net Sales
$
6,710.40
Costs (except depreciation)
(5,517.90)
Gross Profit
$
1,192.50
Depreciation
(243.10)
SG&A
(324.00)
Total operating costs
(567.10)
Earning Before Interest & Tax
$
598.02
Less: Net interest
(117.20)
Income/(Loss) from Affiliates and others
13.80
Earning Before Taxes Excluding Unusal Items
$
494.62
Restructing Costs and Unusual Items
55.78
Earning Before Taxes Including Unusal Items
$
550.40
Taxes
(159.80)
Earnings from Cont. Opeartions
$
390.60
Earning of Discontinued Operations
(2.20)
Minority Interest in Earnings
(0.50)
Net Income to Ball Corp.
$
387.90
$
$
$
$
$
$
$
2011A
7,630.00
(6,254.10)
1,375.90
(265.50)
(356.80)
(622.30)
764.60
(149.40)
114.90
730.10
(5.70)
724.40
(175.80)
548.60
(74.90)
(5.70)
468.00
$ 8,630.90
(7,081.20)
$ 1,549.70
(301.10)
(381.40)
(682.50)
$ 836.90
(177.10)
10.10
$ 669.90
$ 669.90
(201.30)
$ 468.60
(2.30)
(22.30)
$ 444.00
2012E
$
$
$
$
$
$
$
8,724.29
(7,173.66)
1,550.63
(300.00)
(404.91)
(704.92)
845.71
(177.00)
11.40
680.11
680.11
(190.43)
489.68
(25.50)
464.18
2013E
$ 9,282.92
(7,608.52)
$ 1,674.40
(317.86)
(430.84)
(748.70)
$ 925.70
(203.50)
11.40
$ 733.60
$ 733.60
(205.41)
$ 528.19
(27.51)
$ 500.68
2014E
$
$
$
$
$
$
$
9,879.07
(8,093.82)
1,785.25
(337.00)
(458.51)
(795.51)
989.74
(213.21)
11.40
787.94
787.94
(220.62)
567.32
(29.55)
537.77
2015E
2016E
$ 10,522.13
(8,617.42)
$ 1,904.71
(357.57)
(488.35)
(845.92)
$ 1,058.79
(217.84)
11.40
$
852.35
$
852.35
(238.66)
$
613.69
(31.96)
$
581.73
$ 11,203.31
(9,172.11)
$ 2,031.21
(379.32)
(519.97)
(899.29)
$ 1,131.91
(217.22)
11.40
$
926.09
$
926.09
(259.31)
$
666.79
(34.73)
$
632.06
Common dividends
Addition to retained earnings
$
(38.00)
349.90 $
(36.71)
431.29 $
(47.21)
396.79 $
(61.52)
402.66 $
(59.37)
441.31 $
(57.29)
480.48 $
(55.28)
526.44 $
(53.35)
578.71
Number of shares
Dividends per share
Earnings per share
$
$
190
0.20 $
2.04 $
184
0.20 $
2.55 $
169
0.28 $
2.63 $
153.8
0.40 $
3.02 $
148.4
0.40 $
3.37 $
143.2
0.40 $
3.75 $
138.2
0.40 $
4.21 $
133.4
0.40
4.74
Source: DU Estimates, BLL Filings
BLL Corp.: December 31 Balance Sheets
(in millions of dollars)
Year
Assets
Cash
Accounts receivable
Inventories
Total current assets
Goodwill
Intangible Assets, Net
Fixed assets at cost
Accumulated depreciation
Net plant and equipment
Others
Total Assets
Liabilities and Equity
Accounts Payable
Notes payable
Current Portion of LT Debt
Accruals
Other Current Liabilities
Total current liabilities
2009A
$
$
$
$
$
$
Pension & Other Post-Retirement Benefits
Long-term bonds
Other Non-Current Liabilities
Total Liabilities
$
Common Stock (par plus paid in capital)$
Treasury Stock
Retained earnings
Comprehensive Inc. & Others
Total Common equity
$
Minority Interest
Total Liabilities and Equity
$
$
2010A
210.60
439.90
944.20
1,594.70
$
2,114.80
420.60
4,278.50
2,329.50
1,949.00
409.20
6,488.30
$
581.80
63.50
248.80
212.00
324.10
1,430.20
$
1,013.20
2,291.10
170.80
4,905.30
2012E
152.00
774.30
1,083.90
2,010.20
$
165.80
840.60
1,072.50
$ 2,078.90
$
2,105.30
417.60
4,127.10
2,078.90
2,048.20
346.40
6,927.70
$ 2,247.10
450.20
4,497.30
2,231.90
2,265.40
243.00
$ 7,284.60
$
$
$
$
700.30
76.20
36.40
258.20
312.20
1,383.30
$
963.30
2,702.00
221.00
5,269.60
1,143.70
2,697.40
209.40
$ 5,906.60
$
$
830.80 $
(1,582.80)
2,397.10
(63.80)
1,581.30 $
1.70
6,488.30
2011A
$
$
847.30
379.60
68.30
248.30
312.60
$ 1,856.10
$ 158.90
$ 7,284.60
2014E
205.07
768.99
1,183.68
2,157.73
$
218.20
818.23
1,259.47
$ 2,295.89
$
2,428.47
493.13
4,843.84
2,531.90
2,311.94
391.24
7,782.51
$ 2,638.78
524.71
5,263.33
2,849.77
2,413.56
416.29
$ 8,289.23
$
$
$
$
804.54
184.46
273.95
364.78
1,627.72
$
1,191.60
3,363.70
228.81
6,411.83
1,267.90
3,583.28
243.46
$ 6,826.60
$
$
893.40 $ 941.70 $
(2,123.10) (2,615.70)
2,829.80
3,228.30
(82.10)
(335.20)
1,518.00 $ 1,219.10 $
140.10
6,927.70
2013E
$
$
856.05
196.28
291.49
388.13
$ 1,731.95
$ 204.41
$ 8,289.23
2016E
232.21
870.77
1,340.35
2,443.33
$
247.32
927.46
1,427.60
$ 2,602.38
$
2,860.68
558.40
5,705.93
3,186.77
2,519.16
443.02
8,824.60
$ 3,095.78
594.75
6,174.86
3,544.33
2,630.53
471.86
$ 9,395.31
$ 3,343.25
633.25
6,668.47
3,923.66
2,744.81
502.41
$ 9,994.58
$
$
911.03
208.88
310.21
413.06
1,843.18
970.33
222.48
330.40
439.95
$ 1,963.15
$ 1,033.15
236.88
351.79
468.43
$ 2,090.24
$
1,349.33
3,723.76
259.09
7,175.35
1,437.16
3,777.81
275.96
$ 7,454.08
1,530.20
3,784.53
293.82
$ 7,698.80
$
$
1,010.11 $ 1,083.49 $
(3,115.70) (3,565.70)
3,630.96
4,072.27
(334.91)
(331.83)
1,190.45 $ 1,258.23 $
180.22
7,782.51
2015E
$
$
263.34
987.50
1,520.02
$ 2,770.85
1,162.20 $ 1,246.63 $
(3,965.70)
(4,315.70)
4,552.75
5,079.19
(331.83)
(331.84)
1,417.42 $ 1,678.28 $
231.84
8,824.60
$
262.95
$ 9,395.31
1,337.19
(4,665.70)
5,657.90
(331.84)
1,997.55
$
298.23
$ 9,994.58
Pro Forma Statement of Cash
BLL Corp.: Statement of Cash Flows for Fiscal Years Ending December 31
(in millions of dollars)
Year
Net Income to Ball Corp.
+ Depreciation & Amortization
Changes in Accounts Receivables
Changes in Inventory
Changes in Accounts Payables
Other Operating Items
Cash Flow from Operations
2009A
$
$
387.90 $
243.10
33.80
74.80
(150.00)
(29.90)
559.70 $
2010A
468.00 $
265.50
(334.40)
(139.70)
118.50
137.30
515.20 $
2011A
444.00 $
301.10
(66.30)
11.40
147.00
111.20
948.40 $
2012E
464.18 $
300.00
71.61
(111.18)
(42.76)
72.87
754.72 $
2013E
500.68 $
317.86
(49.24)
(75.79)
51.52
72.87
817.89 $
2014E
537.77 $
337.00
(52.55)
(80.88)
54.98
72.87
869.18 $
2015E
581.73 $
357.57
(56.68)
(87.25)
59.30
72.87
927.53 $
2016E
632.06
379.32
(60.04)
(92.42)
62.82
72.87
994.60
Ball Corp. Ratio Analysis
2009A
2010A
2011A
2012E
2013E
2014E
2015E
Forward
5 Yr
Avg.
2016E
Profitability
ROA
ROE
5.98%
24.53%
6.76%
30.83%
6.10%
36.42%
5.96%
38.99%
6.04%
39.79%
6.09%
37.94%
6.19%
34.66%
6.32% 6.12%
31.64% 36.61%
Gross margin
Operating Margin
NI Margin
17.77%
8.91%
5.78%
18.03%
10.02%
6.13%
17.96%
9.70%
5.14%
17.77%
9.69%
5.32%
18.04%
9.97%
5.39%
18.07%
10.02%
5.44%
18.10%
10.06%
5.53%
18.13% 18.02%
10.10% 9.97%
5.64% 5.47%
LT Debt/Asset
EBIT/Interest Expense
35.31%
5.10x
39.00%
5.12x
37.03%
4.73x
43.22%
4.78x
43.23%
4.55x
42.20%
4.64x
40.21%
4.86x
37.87% 41.34%
5.21x
4.81x
1.14x
12.57x
6.17x
9.76x
1.21x
10.69x
6.57x
9.15x
1.16x
10.84x
6.36x
8.69x
1.16x
11.70x
6.23x
9.16x
1.15x
11.70x
6.23x
9.16x
1.16x
11.70x
6.23x
9.16x
1.16x
11.70x
6.22x
9.16x
1.16x
11.53x
6.25x
9.07x
29
59
37
51
34
56
40
50
34
57
42
49
31
59
40
50
31
59
40
50
31
59
40
50
31
59
40
50
32
58
40
50
13.70%
15.38%
27.86%
20.65%
24.88%
13.12%
12.63%
9.46%
-5.13%
3.28%
42.12%
181.76%
1.08%
0.06%
1.05%
4.54%
14.60%
-33.14%
23.73%
6.40%
7.98%
9.46%
7.86%
11.78%
21.05%
-5.11%
6.42%
6.62%
6.92%
7.41%
11.30%
5.51%
7.39%
6.51%
6.69%
6.98%
8.17%
12.10%
5.95%
7.04%
Margin
Solvency
Performance Measures
Asset Turnover
AR Turnover
Inventory Turnover
AP Turnover
Liquidty
Avg. Days Receivable
Avg. Days Inventory
Avg. Days Payable
Avg. Cash Conversion Cycle
Growth YoY
Net Sales
Gross Profit
EBIT
Net Income
EPS
Cap Ex
Free Cash Flow
6.47% 5.38%
6.64% 5.60%
6.91% 6.26%
8.65% 7.33%
12.59% 12.47%
5.26% 0.93%
7.59% 8.13%
Residual Income Rationale
This paper identifies problems related to RIV in an equity valuation context. Three
problems are discussed. First, on a per share basis clean surplus will not generally hold
if there are expected changes in shares outstanding; this aspect eliminates a necessary
condition for the RIV-formula to be valid. Second, an all equity approach does not work if
the firm plans to bring in "new" shareholders who derive a net benefit from their capital
contributions. Third, GAAP violates clean surplus because some capital contributions are
not accounted for in market value terms. As an alternative to RIV, the paper shows that it
makes more economic/accounting sense to focus on expected eps, adjusted for dps, as
a valuation attribute instead of current book value and expected residual earnings.
Source: James A. Ohlson, Stern School of Business, New York University
Plant Locations
Ball’s Plants Worldwide
Value Creation Model
Regional Premiums
Historical Forward PE
Source: Bloomberg
Historical Forward EV/EBITDA
Source: Bloomberg
Environmental Impacts
Source: Ball 2010/11 Sustainability Report
WACC
FCFF Model
Option Pricing Model
Residual Income Model
EVA