July 3, Market Cap 7.1B following reasons:

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1 Student Investment Report: Crown Holdings Inc. Summary Crown Holdings is a leading global metal packaging Recommendation BUY producer with operations in 40 different countries. Sector Materials The company was formerly known as Crown Cork & Seal and was founded in The sales for the Industry Packaging and Containers company are broken down into beverage packaging Price Target $59.80 (57%), food packaging (28%), and specialty packaging (15%). Crown is currently the #1 Price as of 7/3/2016 $50.88 producer of food cans and the #3 producer of Potential Upside 16.90% beverage cans in the world. It employs around 23,000 employees and had net sales of 8.8 billion as of Dividend N/A Market Data ($ in USD) Investment Thesis I recommend BUY on Crown Holdings for the Market Cap 7.1B following reasons: Shares Outstanding M 1. Consumers are shifting in preference from glass to 52 Week Price Range $ $55.44 cans in the beverage market. Surveys show that 85% of consumers believe a can effectively blocks Beta out the light and preserves the beverage s taste. Financial Data (FY2015) 2. Crown has expanded its global presence in recent years with acquisitions that place them in position Revenue (USD) 8,762B to capture the increased demand in emerging markets. The emerging markets experienced Revenue Growth (Y/Y) larger than expected growth in 2015 and the trend Operating Income 927M is expected to continue as disposable income increase leads to increase beverage can consumption. 3. Crown will improve food packaging margins with the integration of recently acquired Mivisa s best in class operations capabilities in Europe. The canned food market is mature and not expected to grow, but with increased margins this will free up cash for future investments. Risks to this recommendation 1. Raw material prices and substitution If the price of metal increases it could encourage the food and beverage producers to switch to non-metal packaging 2. Declining demand If the carbonated beverage market declines faster than expected in the U.S. and if global beverage can market reduces consumption. 3. Exchange rate With 75% of sales coming from international market, company earnings could be negatively impacted by a strengthening U.S dollar. 1

2 Table of Contents July 3, 2016 Table of Content 2 Company overview 3 Business Segments 3 Beverage Cans 3 Food Cans and Closures 3 Other Revenue 4 Market Outlook and Competitive Landscape 5 Current Market Events 7 Investment Thesis 7 Fundamental Drivers 7 Economic Analysis 8 Financial Analysis 9 Revenues 11 Operating Income 11 Valutation 12 DCF Model 12 Relative Valuation 12 Final Price Target 14 Risks and Concerns 15 Conclusion 15 Appendix I 17 Appendix II 18 Reference Page 19 2

3 Company Overview July 3, 2016 William Painter founded Crown Holdings in Crown Cork and Seal was the original name and the company s mission was to provide a better option in the beverage packaging industry. Throughout the years, Crown has been one of the front-runners in developing and implementing new technologies to improve the metal packaging process. Acquisitions and expansions have enabled Crown to become the #3 producer of beverage cans and the #1 producer of food cans in the world. It currently employs around 23,000 with net sales of around 8.8 Billion in The company has operations all over the world with 77% of the sales coming from outside of the United States. This helps Crown understand global customers needs and expectations along with helping to lead the charge in overall sustainability. The beverage can, which represents 57% of the sales i2 completely recyclable and is currently recycled in some countries at rates around 90%. Business Segments Beverage Cans Crown has three main product divisions with the largest one being beverage cans. Crown supplies cans to a variety of the leading beverage producers in the world such as Coca Cola and Anheuser Busch InBev. The beverage can industry is a mature market and is highly competitive. While the basics of the can have not changed much over the recent years, the customer demands have. Can size differentiation and specialty logos such as temperature indicators are some of the ways customers have tried to improve their brand image. The ability to work directly with the customers on these requests in individual global markets have allowed and will continue to help Crown obtain growth in the markets. Food Cans & Closures Food can packaging is the second leading product division for Crown. It is currently the #1 provider of food cans globally. The food can comes is numerous shapes, sizes, and types to fit the individual needs of the customers and food type. Innovation has lead to several of the industry 3

4 leading closure solutions to keep up with the changing requirements of the food industry. Some of the food types that are enclosed by Crown packaging are fruits, meats, and infant formulas. Other Revenue The final division of Crown is the aerosol and specialty packaging segment. Aerosol cans are used for personal care, household goods, and industrial products. The specialty packaging division operates primarily in the European and Asian markets providing unique shapes and sizes to various customers. Products that are unique and typically more expensive will use special packaging to make the product stand out. Examples of these are high end coffee and chocolate manufacturers. Figure 1 - Breakdown of Crown Revenues Source Crown Annual Report 4

5 Market Outlook and Competitive Landscape In the coming years, the markets that Crown operates in are expected to vary in growth potential. Beverage can consumption is expected to grow in all parts of the world with the developing countries leading the way as disposable income increases and products are made more available. The beverage can business represents 57% of the company revenue. North American and European markets are the leading consumers but expect modest growth because of the maturity of the market. The growth in these markets will be based on consumer preference switching to the can from other packaging alternatives. The most growth potential is in the emerging markets where Crown is in a strong position to capture market share with the acquisitions of new plants in Asia and Mexico. Crown is the current market share leader in Vietnam, Cambodia, and Singapore. It also has strong positions in Mexico and Brazil. The beverage can industry is very competitive and market share is hard to capture in mature markets without acquisitions or price wars. Historically the competitors have not competed in price wars to prevent a reduction in margins and this is expected to continue moving forward. Most contracts with beverage producers are long-term contracts so this makes the competition to take market share more difficult as well. There is potential for a rogue can supplier to enter the market and begin a price war and reduce the profitability for all participants, but currently that risk is low. The industry is also very capital intensive, which can prevent new entrants from entering and disrupting the current market shares. The opportunity to grow profits in this type of landscape is by becoming more efficient and cost effective company wide. Crown has been a leader in developing new technologies and consumer relationships to drive this growth. Some of the main focuses are promoting value added processes to the manufacturing systems, working directly with customers to develop or enhance packaging products, and creating cost reducing manufacturing systems. Through the use of this research and development, Crown has been able to reduce raw material usage and enhance the performance of the beverage can resulting in increased customer satisfaction and reduced costs. 5

6 Food packaging represented 28% of the company revenues in Crown is the global leader in food can production and is expected to continue this trend in the future. The demand for food cans is expected to stay at its current level with the declining use in developed markets being offset by increased demand in developing countries. There has been a shift from can usage over the last few decades as developed markets have started to prefer fresh products rather than canned. The decline has bottomed out and demand is expected to stay relative to its current state. The shift in canned food consumption will increase the price competition on the remaining market shares. Crown has recently completed the acquisition and integration of Mivisa, which is a leading European food packaging company with state of the art equipment. With this merger, Crown will be able to use the manufacturing processes to reduce costs and increase margins segment wide as the technology is state of the art. The remaining Crown revenues come from the aerosol and specialty packaging segments. (15%) This is another highly competitive market that is not expected to have much growth demand. Consumers in developed markets are not expected to increase the usage of aerosol products such as household goods and personal care products. There is potential for developing markets to increase the demand for these products as the disposable income increases, but this is expected to be minimal. Crown is beginning to work directly with the customer in the specialty packing markets to help them differentiate the individual brands. The demand for this market is not expected to increase so the focus will be cost reduction in the manufacturing processes. A final competitive advantage that Crown has is the fact that it does not pay dividends. Crown is able to use the income to quickly pay down the debt incurred from recent acquisitions and expansions. This will improve the financial health of the company and allow Crown the ability to engage in future value creating opportunities in the emerging markets. 6

7 Recent Events / Stock news The Brexit vote was a shock to the world in recent events. The British voted to leave the European Union, which caused the British pound to fall to its lowest level in decades and sent global markets into turmoil. The Dow dropped almost 900 points in the first two days after trading. It has caused market uncertainty and low investor confidence since this could lead to other countries leaving the EU and creating an economic crisis in the European market. Crown stock was trading close to the 52 week high prior to the Brexit vote. The price dropped 6% the day of the announcement after trending upward for several weeks following the first quarter results. Earning per share had outperformed analyst s predictions for the first quarter and resulted in yearly estimates being increased. This performance was a result of higher margins from operational efficiency and an increase in beverage sales globally Investment Thesis Fundamental Drivers The future success of Crown Holdings will rely on two fundamental drivers: The growth of emerging markets and the return on assets. The North American and European beverage markets are a low growth industry. There is potential for increased growth if the switch from bottles to cans in the popular microbrew market takes off, but the emerging markets should lead the top line growth. There is potential for the emerging markets to grow from 7 to 13 percent in the near future. A conservative 2 to 3 percent in total revenue growth was used for this analysis. Crown has placed itself in a great position globally to service new markets. There are new production facilities opening in Mexico, Cambodia, and Turkey to strengthen an already competitive position in the surrounding markets. The plant in Mexico is already completely sold out of the first beverage can production line that will produce 1.6 billion cans and is considering investing in an additional line to capture the increased demand. Emerging countries are expected to have increased discretionary income in the future that will lead to additional spending on beverage and food products. 7

8 The second fundamental will be the use of current assets. The management at Crown has improved manufacturing efficiency and acquired several firms in recent years increasing the value of the company. One of the most effective ways to increase profits in a highly competitive low growth market is to decrease the operational costs. The operating margin at Crown has improved as a result of these investments. With the new technology that was acquired from the mergers being implemented company wide, the return from current assets will increase the net profits. Crown is also committed to returning value to the shareholders by not issuing dividends and using the cash to pay down debt and buyback outstanding shares. This strategy will reduce the overall debt of the company much faster than competitors who are issuing dividends and allow Crown to invest in new opportunities in emerging markets. Economic Analysis The financial health of Crown will continue to correlate to the health of the entire market. In a healthy growing market the consumers will have more disposable income and consumption will increase while the opposite will happen when the markets is decreasing. A country s GDP is highly correlated to personal spending as seen in the graph below. The stock price is strongly correlated to the GDP and the personal consumption spending. Figure 3 below shows the stock price fluctuations from the last 10 years and compared to the figure 2 above it, the lines are similar. The majority of Crown s revenue is earned from canned beverage industry and an increase in personal spending will result in growing beverage sales. Since 77% of Crown s revenues come from outside the U.S., the Global GDP growth is very important to consider when evaluating the company s outlook. The European market is expected to continue to grow around 1 to 2%, which is similar to the United States. The main opportunity is in the emerging markets sector that shows expected GDP growth rates between 4 to 5% for the next 5 years. Crown has a good footprint in these emerging markets and should be able to capture high returns from the increase in personal spending in these markets. 8

9 6/1/ /1/2006 6/1/ /1/2007 6/1/ /1/2008 6/1/ /1/2009 6/1/ /1/2010 6/1/ /1/2011 6/1/ /1/2012 6/1/ /1/2013 6/1/ /1/2014 6/1/ /1/2015 6/1/ July 3, Correlation Personal Consumption Spending Gross Domestic Procuct Figure 2-10 Year History of U.S. GDP to Personal Consumption Spending Correlation Price to GDP.73 Price to PCE.063 Stock Price Stock Price Figure 3-10 Year History of Crown Stock Price Financial Analysis Crown has currently underperformed the S&P 500 Index over the last year by around 7%. This is shown in the figure 4 below. This underperformance can be attributed to investor s uncertainty in the global markets in general. The stock price of Crown is typically more volatile compared to the S&P 500 because of the nature of the business. Figure 5 reveals that until the Brexit vote happened 9

10 causing a steep decline in global markets, Crown was outperforming the market by about 3%. This is in response to Crown beating EPS expectations in the first quarter and with additional plants opening up this year, EPS is expected to continue to outperform. Figure 4 - Crown stock performance relative to S&P - Source Fidelity Figure 5 - CCK Stock performance prior to Brexit -Source Fidelity Figure 6 below shows Crowns performance against direct competitors. Crown is outperforming in all segments listed here and this is expected to continue. You will notice that in some key categories such as operating margin and total revenue, Crown is the industry leader. The low P/E ratio suggests that this stock is a good buy currently compared to the competitors and this statement will be further supported in the valuation section. 10

11 Figure 6 - Competitor comparison Revenues July 3, 2016 Name CROWN HOLDINGS INC BALL CORP SILGAN HOLDINGS INC Total Revenue (Billion) $8.70 $7.80 $3.70 Profit Margin (TTM) 4.94% 1.70% 4.43% Operating Margin (Most Recent Qtr) 11.67% 8.94% 7.38% Operating Margin (TTM) 12.21% 9.95% 8.69% Return on Sales (TTM) 4.94% 1.70% 4.43% Return on Investment (TTM) 7.23% 2.44% 6.62% EPS (TTM) $3.07 $0.94 $2.74 P/E(Current Year) The beverage can revenue will be the primary growth driver since it makes up most of the revenues. The consensus estimate shows revenue growth dipping in 2016 by 1 to 2 percent, but then increasing to 1% moving forward. I think that this growth rate was a bear scenario and the actual will be closer 2 to 3% moving forward. Consumer trends and the emerging markets demand increase will push the growth rates higher. While beverage consumption is not expected to increase much in the mature market, consumer preference toward the can will provide additional growth. Surveys have shown that the consumer is starting to prefer that taste preservation features of the can over the bottle especially in the booming microbrew market. The emerging markets could provide as much as double digit increases in consumption in the coming years but this is best-case scenario so I factored a conservative total growth rate around 2% for future years. Operating Income The company will increase the value to shareholders in the future with increasing operating margins. Figure 6 above shows that Crown has the highest margins of the group and I expect operating margin to increase to 13.4%. Crown continues to invest in research and development of processes that will cut costs and make can manufacturing more efficient. The recent acquisitions of Mivisa and Empaque have increased margins in the European food and American beverage markets because of the high margin assets that came with the mergers. The advanced techniques from those two companies will be integrated into global operations increasing overall margins. Raw material price fluctuations can have negative effects on the margins but I believe that the new 11

12 assets will more than offset the potential increases. Crown also has been very successful in the past at pushing increases in raw material prices to the customers. Appendix I has the historical and projected financial statement information. Valuation DCF Model A Discounted Cash Flow Model was used to help determine a target price. Using a 10% discount rate and a 3% terminal growth rate yielded a target price of $ The 10% discount rate was used because of the correlation between the market and Crown stock price. The volatility of Crown should be close to the market, just slightly higher or lower depending on which way the market is trending so 10% was an appropriate percent. The terminal growth rate of 3% was chosen to show that I expect the growth to mirror the expected GDP growth rate since historically this is the trend in the packaging industry. The forward P/E for Crown is expected to be 14.9 ans is below the current S&P 500 P/E of 18.9 and the material sector P/E of This trend is in line with the historic data and is deemed reasonable. In figure 7 below, the target price is calculated using adjustments to the discount rate and terminal growth rate. 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 11.5% 1.5% $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ % $ $ $ $ $ $ $ Figure 7 - DCF Sensitivity Analysis Relative Valuation The materials sector is currently trading just above the S&P 500 in P/B and P/EBITSA but slightly below the in P/E and P/S. Over the last ten years the average ratios are very similar to the S&P as 12

13 shown in figure 8. Based on these values I believe that the industry is properly valued and this trend is expected to continue moving forward since the movements of the market dictate the sector behavior. Figure 8 - Financial ratios for the sector and sector relative to S&P Source Bloomberg The financial ratios of Crown holdings compared to five peers are shown in figure 9 below. You can see that Crown is trading below the average in several categories. This provides support for the argument that the price is undervalued taking into account the company performance mentioned in the previous section. The P/B ratio is the only one that is higher than the average and I believe this is skewed because of a potentially low book value in relation to the recent acquisitions that lead to high debt. I predict that the low P/E ratio indicates that Crown is undervalued and will move closer to the industry average in the future. 13

14 Figure 9 - Comparison against peers - Source Bloomberg Figure 10 - Projected target multiples Final Price Target Using the target prices from figure 10 and the DCF calculated value of 59.47, a weighted average final target price is $ I did not include the P/B ratio in this calculation because I thought the ratio was currently skewed and not close to the historical average of 29. The remainder of the target multiples were adjusted to move Crown closer to the industry and peer averages since it is currently trading below. The final target price represents an upside of 17.5%. 14

15 Method Weight Price Target DCF P/E P/S P/EBITA Final Target Price Figure 11 - Final target price calculation Risks and Concerns There are several risks associated with the Crown s financial estimates. One concern is the possibility of a global decline in food and beverage consumption. If the growth predictions or consumer trends change and there is an excess supply of cans in the market, margins and earnings will be negatively impacted across the entire industry. There is also a currency exchange risk. Currently around 77% of revenues come from outside the United States and if the value of the dollar strengthens is relation to global currencies, the earnings will be negatively impacted and stock price could suffer. The final concern that I will mention will be the change in competitor behavior. Historically, the can industry has been made up of companies that do not price gouge to obtain market share. If there is a switch in attitude to price competition, margins will decrease across the industry and companies will need to reduce price to stay competitive. Conclusion Crown has the potential for increased revenue growth in the coming years. Combining the new technologies and the global footprint in emerging markets will be key drivers to future success. The integration of the acquired companies and opening of the new facilities will enable Crown to capture the increased demand in the emerging markets while enjoying high margins. I feel currently that Crown stock is trading below the true market value and recommend this as a BUY 15

16 stock. Crown has outperformed the projected EPS for the last 4 quarters and the stock price has outperformed the market by several percent prior to the Brexit reduction. The current stock price of $50.88 is under my target price of $59.80, which is an upside of 17.5%. 16

17 Figure 12 -Appendix I July 3, 2016 Crown Holdings Analyst: FY FY FY FY FY FY FY FY (in Millions) 2018E 2017E 2016E Consensus 9,050 8,910 8,640 Net Sales 9,113 8,935 8,674 8,762 9,097 8,656 8,470 8,644 Cost of Goods Sold 7,200 7,183 6,992 7,116 7,525 7,180 7,013 7,120 Gross Profit 1,914 1,751 1,683 1,646 1,572 1,476 1,457 1,524 Depreciation and amortization Marketing, General, and Admin Expense Other Operating expenses(provision for Asbestos and restructuring) Operating Income 1,221 1,072 1, Interest Income, Net Income Before Income Taxes 1, Provision for Taxes (17) 194 Equity Earnings 5 3 Net Income from Cont Ops Net income attributable to noncontrolling interests (70) (70) (76) (68) (88) (104) (105) (114) Net Income EPS Basic Diluted Consensus - GAAP Guidance Shares Outstanding Basic Diluted Tax Rate 25.0% 25.0% 25.0% 27.9% 7.9% 25.7% -2.6% 33.0% D&A % of Sales 2.7% 2.7% 2.7% 2.7% 2.1% 1.5% 2.1% 2.0% CapEx % of Sales 4.2% 4.2% 4.5% 4.0% 3.6% 3.2% 3.8% 4.6% Receivables 1,048 1, ,031 1,064 1, % of Sales 11.5% 11.5% 11.5% 10.4% 11.3% 12.3% 12.5% 11.0% Inventory 1,267 1,242 1,206 1,213 1,324 1,213 1,166 1,148 % of Sales 13.9% 13.9% 13.9% 13.8% 14.6% 14.0% 13.8% 13.3% Payables 2,734 2,680 2,602 2,645 2,651 2,547 2,142 2,090 % of Sales 30.0% 30.0% 30.0% 30.2% 29.1% 29.4% 25.3% 24.2% Change in WC 8 12 (121) (75) - Sales 2.00% 3.00% -1.00% -3.68% 5.09% 2.20% -2.01% 8.85% Expenses as % of Sales Gross Margin 21.0% 19.6% 19.4% 18.8% 17.3% 17.1% 17.2% 17.6% Stores and Distribution Exp 2.1% 2.1% 2.1% 2.7% 2.1% 1.5% 2.1% 2.0% Marketing, General, and Admin Expense 4.5% 4.5% 4.5% 4.5% 4.4% 4.9% 4.5% 4.6% SG&A 6.6% 6.6% 6.6% 7.2% 6.5% 6.5% 6.6% 6.6% Other Operating Income, Net 1.0% 1.0% 1.0% 1.0% 1.9% 0.8% 0.4% 1.3% Interest Income, Net 2.2% 2.4% 2.9% 3.3% 3.2% 3.2% 2.6% 3.0% Operating Margin 13.4% 12.0% 11.8% 10.6% 8.9% 9.8% 10.2% 9.7% 17

18 Figure 13 - Appendix II July 3, 2016 Crown Holdings (CCK) Analyst: Terminal Discount Rate = 10.0% 7/3/2016 Terminal FCF Growth = 3.0% (in Millions) Year 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Revenue 8,674 8,935 9,113 9,296 9,481 9,671 9,865 10,062 10,263 10,571 10,888 % Grow th 3.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 3.0% 3.0% Operating Income 1,024 1,072 1,221 1,246 1,271 1,296 1,322 1,348 1,375 1,417 1,459 Operating Margin 11.8% 12.0% 13.4% 13.4% 13.4% 13.4% 13.4% 13.4% 13.4% 13.4% 13.4% Interest Income Interest % of Sales 2.9% 2.4% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% 2.2% Taxes Tax Rate 25.0% 25.0% 25.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% 37.0% Net Income % Grow th 11.1% 19.0% -14.3% 2.0% 2.0% 2.0% 2.0% 2.0% 3.0% 3.0% Add Depreciation/Amort % of Sales 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 3.3% 3.3% 3.3% 3.3% 3.3% Plus/(minus) Changes WC (121) % of Sales -1.4% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Subtract Cap Ex Capex % of sales 4.5% 4.2% 4.2% 4.2% 4.2% 3.7% 3.3% 3.3% 3.3% 3.3% 3.3% Free Cash Flow % Grow th 72.7% 22.2% -17.6% 2.0% 11.0% 18.6% 2.0% 2.0% 3.0% 3.0% NPV of Cash Flows 3,859 47% NPV of terminal value 4,414 53% Terminal Value 11,449 Projected Equity Value 8, % Free Cash Flow Yield 4.27% Free Cash Yield 6.80% Current P/E Terminal P/E 14.9 Projected P/E Current EV/EBITDA Terminal EV/EBITDA 8.4 Projected EV/EBITDA Shares Outstanding 139 Current Price $ Implied equity value/share $ Upside/(Downside) to DCF 16.9% Debt 4,592 Cash 717 Cash/share

19 References: 1) 2) 3) 4) CCK Morningstar Equity Research 5) CCK Citi Research Analyst Anthony Pettinari 6) Google Wikipedia 7) CNN Money Charts and analysis 8) Fidelity research tools and charts 9) Securities and Exchange Commission website 10) Bureau of Economic affairs 11) Crown Homepage 12) Crown Annual Report 13) Crown Q1 call 14) Bloomberg terminal 19