Crown Holdings

We will discontinue analyst coverage of Crown Holdings on or about Nov. 12.

We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We will discontinue analyst coverage of Crown Holdings on or about Nov. 12.

We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We increase our fair value estimate for narrow-moat Crown to $116 per share from $112 due to higher near-term operating margins in the firm's European beverage business. We see solid growth and profitability for Crown over our five-year forecast horizon with consolidated sales growing at a 4.0% compound annual rate and operating margins averaging about 13.2% (compared with the 11.1% 10-year average). Crown posted strong revenue growth in 2021 and 2022, driven by robust demand for aluminum cans and its competitive pricing. Demand softened somewhat since its peak as consumers returned to on-premises consumption and retailers began destocking built-up inventories in 2023 and into 2024. Destocking has largely subsided, which has benefited volumes, but tepid consumer spending in some regions remains a headwind. We expect near-term demand to remain pressured, but we think Crown will benefit from a longer-term shift to eco-friendly packaging and aluminum beverage cans. Our stage 2 model assumes Crown can generate a 15% return on new invested capital and 5% earnings before interest growth for 10 years after our five-year explicit forecast period.

We think Crown is well-positioned to benefit from continued growth in the aluminum beverage can market. A global push for eco-friendly packaging has increased demand for aluminum cans as their infinite recyclability and low price makes them an ideal choice for beverage makers. Consumers are favoring eco-friendly packaging and many governments are passing new legislation to reduce harm to the environment. Many consumer packaged goods companies have committed to decreasing their ecological footprint, and aluminum cans are the clear choice for eco-friendly beverage packaging. The firm's transit packaging business saw solid growth in 2021 and 2022 on strong end-market demand for its packaging solutions and robust selling price growth. Crown's transit business was hampered during 2020 as the coronavirus pandemic slowed manufacturing in many of its end markets. Manufacturing activity rebounded quickly, with the transit business benefiting from strong demand. Following this period of growth, demand has normalized amid heightened economic uncertainty and diligent inventory management from customers. While Crown is likely to retain most of its pricing, volume growth is likely to remain pressured. Over our five-year forecast, we expect transit packaging to grow at a roughly 1.85% compound annual rate with margins averaging 13.3%.

We think Crown Holdings benefits from durable competitive advantages that should support economic profits for at least the next 10 years. We assign Crown a narrow moat rating based on efficient scale and intangible assets. The majority of Crown’s business (70% of 2024 revenue) involves producing aluminum beverage cans. The aluminum beverage can industry is highly concentrated as most regions are typically serviced by a few large competitors that maintain long-standing relationships and strong contracts with beverage companies. The company also operates a transit packaging division (18% of sales) that produces a wide variety of packaging systems, tools, and components as well as the consumable products.

The aluminum beverage market is served by only a few large competitors due to the high capital costs required to efficiently produce aluminum cans. Crown has significant market share in most regions it operates, supporting our efficient scale moat. The firm accounts for 22%, 18%, and 50% of total aggregate beverage container shipments in North America, Europe, and Southeast Asia, respectively. These markets are currently served by four or five competitors with almost no entry or exit in recent years. It's highly unlikely that an incumbent firm will exit, further preventing would-be entrants from attempting to join the market. Beverage can manufacturers must produce a large number of cans and run plants at high capacity to remain profitable. The low-value nature of aluminum cans paired with high costs of operating manufacturing plants produces a strong barrier for new entrants. Aluminum cans are also a commoditized product with little room for differentiation. Innovation in the segment is easily replicable by competitors as it is usually a change in the size or shape of the can. Because of this, potential entrants would need to resort to price competition to grab market share, which is not a viable alternative.

Can producers typically target a capacity utilization rate between 92% and 95% in their plants. Running the plants at lower than the target rate would directly affect margins as high operating costs would decrease profits. That said, Crown does not want to run its plants near 100% as it’s important to maintain some excess capacity to meet small increases in demand without having to make significant capital investments for a new production line or plant. Creating a new line at a plant can cost in excess of $70 million. It’s also beneficial to operate with some excess capacity in case of an issue at the plant. If a line at the plant goes down or inventory is damaged, Crown will not have excess capacity to produce more cans. The company would have to transport cans from plants farther away and incur extra costs. Due to the high costs associated with producing aluminum cans, competitors in the segment are encouraged to act rationally and have over the years. There is almost no incentive to undercut prices or add additional capacity in the hope of taking business from a competitor. Most can manufacturers operate under long-term contracts that make poaching very difficult. New entrants would most likely be immediately unprofitable upon entering a market as the capital costs of starting and operating a plant are high and finding customers that are not currently serviced would be difficult. Crown operates over 50 beverage facilities in regions around the world. Aluminum beverage containers have a low value/volume ratio so shipping empty cans beyond 200-300 miles is unprofitable. In order to win and service contracts, Crown must operate plants near customers to maintain profitability. This market dynamic discourages new entrants from joining the market as they would need to open multiple manufacturing facilities because it’s unprofitable to ship cans over long distances. Crown and its competitors typically sell aluminum beverage containers under staggered long-term contracts that provide these companies with a strong competitive advantage. The long-term nature of these contracts creates predicable demand, enabling Crown to prepare its production schedules for years ahead. This allows the plants to operate in a manner that maximizes capacity and efficiency. Since the contracts are also staggered, beverage producers do not have many choices when contracts are up for renewal as it's unlikely any other can producer will have enough excess capacity to fulfil their orders. This is especially prevalent with larger customers that need a significant number of cans and cannot afford any delays. Crown’s contracts also contain cost-recovery provisions that limit its exposure to aluminum prices with price contingencies. This contract feature has been especially important in recent years as aluminum prices have increased considerably. While Crown has been able to pass through most increases, there is a lag as most contracts are on an annual basis. Historically, this lag was not an issue but recent increases in aluminum prices have outpaced Crown’s ability to recover price through these contract provisions. As a result, Crown has been negotiating stronger provisions in new contracts and updating provisions in current contracts that would remove the lag and allow the company to recover costs quicker. Crown’s transit packaging division, which accounts for 18% of revenue, was established through the acquisition of Signode Industrial Group in 2018. The segment produces a wide variety of packaging systems, tools, and components as well as consumable products. Signode owns hundreds of brands within the packaging industry to offer customers a full suite of products and services for packing products and protecting those products in transit. While Signode produces protective packaging, it also manufactures the tools and equipment used to apply its packaging materials. Signode’s equipment is critical for its customers as manufacturers need end-of-line packaging for their products. Signode’s equipment and products are embedded in the manufacturer production process, which makes switching providers difficult as it would require the integration of new equipment within the production process and additional training for employees. This is likely to lead to substantial downtime, something Signode’s customers seek to avoid. There is also a risk that the new packaging system does not perform properly, which can lead to product damage during transportation. This leads to some stickiness from Signode’s customers, which rely on the company to ensure the safety of their products during transportation. Unlike Crown’s core beverage business, transit packaging is highly diversified. It produces a variety of products, none of which account for over 15% of revenue, while selling to a substantial number of customers across many countries. Its largest customer accounts for less than 2% of revenue, which reduces the company’s reliance on the concentrated customer base in its beverage business. While we see some competitive advantages around Signode’s imbedded equipment and materials in manufacturing plants, we do not think the business benefits from an economic moat. That said, the transit packaging division is not large enough to have a material impact on our opinion of Crown.

Aluminum cans are an eco-friendly beverage packaging that’s preferred over plastic. A global shift to renewable products will provide a strong tailwind for beverage can growth.

Crown’s interest in emerging markets will provide an avenue for growth outside developed markets.

The transit packaging business reduces Crown’s reliance on beverage and food containers while offering alternative growth prospects.

Crown’s capacity expansion plans are aggressive and could leave the company at risk of significant amounts of excess capacity should demand moderate further.

As soft drinks are replaced with water and mainstream beer is replaced by bottled craft beers, manufacturers could be hurt by falling operating rates.

Crown’s transit packaging business does not add to its moaty packaging business. It draws capital away from the core packaging business and could limit Crown's ability to grow.