Ball Corporation : Defensive stock in the beverage industry

Ball Corporation is a major manufacturer of metal and plastic packaging for food manufacturers, with a minor business in aerospace and defense. Almost 80% of revenues are derived from making aluminum cans for beverages, with the remaining 20% from plastic packaging and the aerospace business. A significant amount of revenue is derived from sale of beer cans, with Ball having 30% of the US market. This is largely a mature industry, although there are small pockets of innovation and higher-than-normal profit niches, such as the introduction of vented wide-mouth cans for pouring, and cold-activated cans. Profitability is dependent on the price of aluminum and demand from major customers such as Coors and Miller.

Free cash flow in 2008 came in at around $300 million, or $3.20 per share. Analyst estimates for 2009 range from $3.70 to $4.00. Assuming an EPS of $3.50, BLL should trade at $35 at a PE of 10, $44 at a PE of 12.5, and $53 at a PE of 15. There appears to be major support at $37.50, and some resistance at $44. Given the recent improvement in economic conditions, it is likely that demand for its product will show a slight improvement. For an established company in a defensive industry, despite a moderate exposure to commodity price swings, I feel that a PE of 12.5-15 is reasonable. I have initiated a position at a price of $41.50.