Glass Maker Offers Growth at Reasonable Price

That cost plunged more than 90%, and the bottle-blowing trade fell into permanent decline, following the commercial introduction in 1905 of a sort of giant metal arachnid with pumps for legs. Using two unskilled workers operating in two 12-hour shifts, Michael J. Owens's automatic glass-blowing machine could produce 17,000 bottles a day — rising to 72,000 for a 1912 version — at a cost of around a dime per gross.

The Owens Bottle Machine Company is still the world's largest maker of glass containers, although today it goes by the name Owens-Illinois (OI), reflecting a 1929 merger with Illinois Glass. You might think the glass container business had gone the way of, well, the glass two-liter of Mountain Dew. Owens stock suggests otherwise. Five years ago it went for $9. Today it's at $56.

It's not so much that the glass bottle is making a comeback vs. plastic, although management is quick to tout the environmental appeal of a reusable, recyclable container made from sand and not petroleum. Credit the stock's run instead to a financial restructuring and surging demand overseas.

Glass is still preferable to plastic for a variety of uses. Its distinctive look keeps wine and liquor classy. It doesn't interfere with beer's taste, and keeps it cold longer. And glass's chemical inertness, along with its 3,000 or so years of market testing, edge out plastic when it comes to products where a little safety paranoia is in order, like baby food. Markets for those products have long since matured in America, but demand for beer and baby food is soaring in the fast-growing economies of South Africa, Eastern Europe and Asia. Owens has positioned itself nicely for that growth, buying a big European bottle maker in 2004, starting a joint venture with a Russian beverage company in 2005, buying a plant in China in 2006 and opening a newly built one in Peru in 2007.

Last year Owens sold its plastics business, which it first entered in 1932, for $1.2 billion. The move allowed the company to pay down its debt to $3.7 billion from $5.5 billion, slashing its interest payments. Also in recent years the company has increased prices to offset rising materials costs and focused more on profitability and cost efficiency than volume. (Much of the effort was overseen by Stephen McCracken, a Dupont (DD) veteran hired as chief executive in 2005, who died from cancer in February.) The numbers suggest the financial overhaul has worked nicely. Last year sales increased 14%, five percentage points of which came from pricing. Earnings from continuing operations reached $300 million, up from a small loss in 2006. Return on invested capital totaled 18%, more than five percentage points better than its peak from the past five years.

This year sales are seen increasing just shy of 7%, but earnings per share are expected to jump 41%. That's a mixed blessing for stockholders. The earnings growth is stellar, but it's coming more from efficiency measures than a continued expansion of the business, and cost-cutting can only last so long. Next year analysts foresee sales growth of just 4% and profit growth of 16%. Still, the stock is reasonably priced at 14 times this year's earnings forecast. Don't be lured by the stock's listed yield of more than 4%. Management eliminated the dividend in March. That should at least bode well for further debt reduction and free-cash-flow improvement.

Owens-Illinois turned up recently along with seven other names in a screen for companies with modest valuations relative to their growth rates. To run the search for yourself, refer to the full list of criteria and use SmartMoney's stock screener.

Also See:

Shifting Gears at Ford

Suit Seller's Stock a Good Fit for Bargain Hunters

Deep Value Investing in the "G Ice" Age