Crown Holdings Q1 Earnings: A Volatile Prospect That’s Worth Considering (NYSE:CCK)

April 29th ended up being a rather interesting day for shareholders of metal packaging firm Crown Holdings (NYSE:CCK). After the market closed, shares jumped about 3.3% in response to management announcing financial results covering the first quarter of the company’s 2024 fiscal year. Although the firm failed to meet expectations when it came to revenue and earnings per share, adjusted earnings per share exceeded forecasts and management reaffirmed solid bottom line growth for this year relative to last year.

To be honest, mixed results should not be surprising for this space. The packaging industry has always been subjected to some degree of volatility. In recent years, the financial picture had been quite impressive. This has been especially true on the bottom line for Crown Holdings and other companies like it. This volatility is likely what has been responsible for the company’s underperformance relative to the broader market. You see, back in October of 2022, I wrote a bullish article about the firm, with my optimism based on strong fundamental performance and the fact that shares were attractively priced. I expected some nice growth from the company. However, shares have seen downside of 2.9% since then. That’s far worse than the 35.2% increase seen by the broader market over the same window of time.

Fast forward to today, and the picture is still rather complex. But I wouldn’t exactly call it bad. Volatility is almost certain to remain the story for this name. But whether or not it makes sense to buy into is a different question entirely. On an absolute basis and relative to similar firms, Crown Holdings does seem to be trading at a slight discount. This gives me some degree of optimism moving forward. On the other hand, for those who can’t deal with volatile revenue and profits, it might be best to look elsewhere for upside.

An interesting quarter

As I mentioned already, after the market closed on April 29th, the management team at Crown Holdings announced financial results covering the first quarter of the 2024 fiscal year. On the top line, the picture was problematic. Revenue of $2.78 billion came in 6.4% lower than the $2.97 billion generated one year earlier. In fact, sales ended up being $150 million lower than what analysts were hoping for. But it doesn’t do justice to look solely at revenue. And that’s largely because a big portion of the company’s business model involves passing on raw material costs, which not only increases, but also decreases, to its customers.

As an example, according to management, the company saw increased beverage can shipments throughout the Americas and European Beverage operations. The firm also benefited to the tune of $10 million from foreign currency fluctuations. Throughout North America, the company benefited from a 7% increase in beverage shipments. In Europe, growth was only about 5%. Combined, this helped to push global beverage shipments up 2.5% year over year. However, there were reduced volumes shipped in most other lines in the business. But in addition to that, the company also passed on $130 million to its customers in the form of lower material costs. In theory, to the extent that prices are decreased because of a reduction in the cost of raw materials, the bottom line for the company should not be negatively impacted.

On the bottom line, the picture is equally complicated. Earnings per share actually fell year over year, dropping from $0.85 to $0.56. This also meant that earnings fell short of expectations by $0.18 per share. But on an adjusted basis, the decline was more modest, from $1.20 to $1.02. In fact, adjusted earnings came in six cents per share higher than what management thought they would. This translated to adjusted earnings of $122 million, with GAAP earnings coming in slightly more than half that at $67 million. One year earlier, these figures were $144 million and $102 million, respectively. Other profitability metrics posted declines as well, but not to the same extent. Operating cash flow actually improved from negative $235 million to negative $102 million. But on an adjusted basis, it dipped only slightly from $285 million to $263 million. Meanwhile, EBITDA for the company fell from $403 million to $383 million.

Although it’s disappointing to see this kind of performance year over year, it is worth noting that recent years have shown similar degrees of volatility. As you can see in the chart above, revenue did drop in 2023 relative to 2022. Net profits also fell. However, cash flows grew nicely, at least when it comes to official operating cash flow and EBITDA. Most importantly, this track record shows you just how volatile the company is from a results perspective.

Despite these problems, management is focused on improving for the long haul. For instance, the firm was able to announce that it just completed its beverage can expansion program that it started in 2019. That includes plant startups in Mesquite, Nevada, and in Peterborough, UK. These investments, as well as others, caused the company to incur significant expenses in recent years. In 2023, for instance, the company allocated $793 million toward capital expenditures. And in the past three years combined, capital expenditures totaled $2.45 billion. But with its current expansion plans completed and no other major projects in the works, the firm is anticipating capital expenditures this year of about $500 million. It expects a similar amount, if not less, in 2025. This should ultimately help free cash flow to come in strong and for the company to use this to pay down the $6.33 billion in net debt that it has and/or to reward shareholders directly.

I would also like to point out that, even though results so far for 2024 are not looking great, management believes that adjusted earnings per share will be between $5.80 and $6.20. At the midpoint, this should translate to adjusted net profits of $725 million. That’s up from the $701 million in adjusted profits generated in 2023. If we assume that other profitability metrics rise at the same rate, then adjusted operating cash flow should be around $1.26 billion, while EBITDA should come in somewhere around $1.95 billion.

With these results, I was able to value the company as shown in the chart above. I also included a valuation that was based on 2023 figures. On a price to earnings basis, shares do look much closer to being fairly valued. But when it comes to the other profitability metrics, the stock looks quite affordable. It’s also worth noting that shares are trading nearer to the low end of the spectrum relative to similar enterprises. In the table below, I compared it with five similar firms. And in each of the three cases, only two of the five companies ended up being cheaper than it.

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Takeaway

To be perfectly honest with you, I came into this article with a mixed view of the firm. In general, I am a fan and shares are attractively priced. But the volatility can be unnerving. It’s also not great to see revenue and official earnings fall short of what analysts anticipated. But the deeper you dig, the more appealing the business becomes. While shares might not be a home run by any means, management is forecasting bottom line improvement that should be higher, on an adjusted basis, than it was in 2023. The company is done spending tremendous amounts of capital on expansion projects and that should help to flow to the bottom line and, ideally, can be used to reduce debt. And relative to similar enterprises, shares look to be slightly toward the low end of the spectrum. In all, the good here outweighs the bad just enough for me to reiterate the ‘buy’ rating I assigned the company back in October of 2022. But I do understand why those who don’t like volatility might choose to look elsewhere for upside.