On Aug 8, we issued an updated research report on Crown Holdings, Inc. (CCK Quick QuoteCCK - Free Report) . The company is well poised to benefit from investment in capacity to meet solid global beverage-can demand, strategic acquisitions to increase geographic presence and product line, and focus on cost control. However, near-term capacity constraints in Brazil, lower volumes in European food can market, weak Transit Packaging segment performance, and input cost inflation remain near-term headwinds.

Tepid Q2

Crown Holdings’ second-quarter 2019 adjusted earnings per share declined 5.8% year over year to $1.46, while revenues fell 0.4% to $3,035 million. Unfavorable currency translation impacted the top line, offset by higher beverage can volumes.

Headwinds to Counter in 2019

Crown Holdings now expects adjusted earnings per share to be $5.05-$5.20 for 2019, down from the prior range of $5.20 and $5.40. Crown Holdings had reported earnings per share of $5.20 in fiscal 2018. The trimmed guidance is primarily owing to lower-than-expected full-year results in the European Food and Transit Packaging segments.

The European food can market is a mature market, which has witnessed stable to slightly declining volumes in recent years. The Transit Packaging segment’s outlook is cloudy given the slowdown in the global manufacturing activity.

In the Brazilian markets, can demand remain high but Crown Holdings will be unable to meet the demand owing to shortage of capacity till the new Rio Verde project comes online. Further, the company anticipates a significant reduction in can demand in Columbia in the back half of this year. This along with the capacity constraints in Brazil will impact results for the Americas Beverage segment in the second half from the prior year. Sales unit volumes in the Middle East have declined in the recent years on account of geopolitical tensions.

Poised Well to Capitalize in Rising Demand

Crown Holdings is anticipated to gain from a rise in global beverage-can demand. Developing markets have experienced higher growth rates due to rising per capita income and the consequent increase in beverage consumption. While the economies in Europe and North America are more mature, there are still growth opportunities aided by beverages, such as energy drinks, teas, juices, sparkling water and craft beer, and an increased preference for cans over certain other forms of beverage packaging. With its many inherent benefits, including being infinitely recyclable, the beverage can continues to become the increasingly preferred package for marketers and consumers globally.

To capitalize on this, Crown Holdings intends to build new facilities and is positioned to gain from the geographic expansion of its beverage can lines. To meet volume requirements in the U.S. and Canadian beverage can markets, the company has begun construction of a third high-speed line at its Nichols, NY facility, which is expected to commence production during the second quarter of 2020. The conversion of an existing two-piece steel food can production line at the Weston, Ontario plant, to aluminum beverage cans, is anticipated to be completed in the first quarter of 2020. Both the Nichols and Weston lines will be capable of producing multiple sizes. Additionally, during the fourth quarter of 2019, the company anticipates beginning operations at a new one-line beverage can plant in Rio Verde, Brazil.

Acquisitions: A Key Catalyst

In April 2018, Crown Holdings acquired Signode Industrial Group Holdings, which is a leading global provider of transit packaging systems and solutions. This broad and diversified Crown Holdings’ customer base and product offerings will benefit earnings and cash flow in 2019. Further, its previous acquisition of EMPAQUE, a leading manufacturer for the beverage industry in Mexico, reinforced the company’s presence in the growing Mexican market.

Raw Material Inflation is a Woe

Crown Holdings uses various raw materials, such as steel, aluminum, tin, water, natural gas, electricity and other processed energy in its manufacturing operations. Cost of these raw materials has flared up owing to the tariffs imposed in the United States, which may escalate costs. The company may not be able to pass through the rise in raw materials costs to customers without suffering losses in unit volume, revenues and operating income. Nevertheless, the company will gain on pricing and cost control efforts.

Price Performance

Over the past year, shares of Crown Holdings gained 59.9% compared with the industry’s rally of 66.2%.

Zacks Rank and Stocks to Consider

Crown Holdings currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Industrial Products sector are Unifirst Corporation (UNF Quick QuoteUNF - Free Report) , Albany International Corporation (AIN Quick QuoteAIN - Free Report) and Cintas Corporation (CTAS Quick QuoteCTAS - Free Report) . While Unifirst and Albany International flaunt a Zacks Rank #1 (Strong Buy), Cintas carries a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Unifirst has a projected earnings growth rate of 15.17% for the current year. The stock has gained 7% in a year’s time.

Albany International has an estimated earnings growth rate of 32.3% for 2019. The company’s shares have gained 10% in the past year.

Cintas Corporation has an expected earnings growth rate of 11.15% for the ongoing year. The stock has appreciated 26% over the past year.

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