Industry Reports

Deutsche Bank Reports Summaries

080513 Deutsche Bank Report - O-I Investor Day

Deutsche Bank - Equity Research

O-I {Ticker: OI, Closing Price: USD 54.21, Target Price: USD 65.00, Recommendation: Buy}.

* Is there another leg to the O-I story or has the story "played out"?

At today's annual Investor Day, the O-I leadership made a solid case for another leg(s). Chairman and CEO, Al Stroucken, and his team laid out a realistic game plan for driving both top-line and bottom line growth over the next several years. We maintain our Buy rating, target price and EPS estimates.

* Key themes & initiatives

(1) Growth opportunities, in existing and new markets, (2) gains in productivity and product pricing, (3) the potential to drive segment operating margins into the upper teens. The “clean-up” phase that marked the early stage of Stroucken's tenure has passed, O-I has begun to focus on offense.

* Raising the bar on EBIT margins

CFO Ed White noted that if each region returned to individual peak margins, O-I would achieve a 17% margin. Although there was no specific target cited, the internal target would appear to be a bit higher than 17%. O-I insisted that all of the firm's effort to improve productivity would not be bid back to the customer.

* Priorities for cashflow?

Top priority is additional financial deleveraging—O-I wants to drive its total debt/EBITDA ratio down to 2X. Next priority is organic growth in existing markets followed by acquisitions. Dividend or buyback was not in the near-term plans, but was an option in the longer term.

* Valuation and risks

Our $65 target price is based on a modified DCF analysis. We use an 8.0% cost of capital, 4.5% 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 inflation. Downside risks include rising input costs, declining sales volume, failure to execute pricing strategies, increasing asbestos charges and economic weakness.