Industry Reports

Deutsche Bank Reports Summaries

080115 Deutsche Bank Report - O-I's Next Step?

Deutsche Bank - Equity Research

Owens-Illinois {Ticker: OI, Closing Price: USD 45.57, Target Price: USD 50.00, Recommendation: Hold}.

* Boosting target price, but downgrading to Hold

We are boosting our target price from $45 to $50, based on impressive execution of the company's margin expansion strategy.

However, the stock's sharp run-up over the last several months dictates that we take our rating to a Hold. Our Hold rating is based on fair valuation, as well as a balancing of upside and downside risks.

* Pricing initiatives could produce further upside

The company's focus is on boosting prices and restoring margins. Between ‘02 and ‘06, EBIT margin in glass dropped from 18.3% to 11.3%. EBIT margin has rebounded to 15% YTD ‘07. Further recovery will require more nuance than just across-the board price hikes. O- I's goal is to move toward “value-based” pricing which differentiates among customers and market niches.

*Are negative volume comparisons in the offing?

Changing the pricing paradigm entails some volume risk, and volume expectations are clearly an issue of managerial concern. Moreover, O- I is facing some tough comparisons. We note that O-I enjoyed 4-5% y/y volume gains in 07H1 and flat volumes in Q3, suggesting both an easing in volume momentum and that 08H1 will face tough comps

* Valuation/Risks

Our $50 target price is based on a modified DCF analysis. We use a 7.4% cost of capital and 3.8% risk free rate (beta of 1.1). We believe the business is relatively stable, thus our nominal growth rate of 2.0% is roughly equal to our inflation for inflation. Risks to the upside include better than expecting pricing gains in Europe and more accelerated margin expansion. Downside risks include rising natural gas prices, declining sales volume and failure to execute new pricing strategies.