FinTekNeeks

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What Does Owens-Illinois Make?

Posted in Trading

Owens-Illinois is another company that is probably not well known, unless you are part of the industry. Companies that produces a product that most people have probably touched or broken. Several years ago, they have changed their name to O-I. We will be calling it OI from now on in this article. So, what does OI produce that is so common as sand in beaches? Well, they produce majority of the bottles in this world.


Glass, glass, and more glass

How can selling glass bottles and glass packaging be a $7 billion dollar business? It has to do with volume. Although OI doesn’t produce all of the glass products in the world, they do specialize in glass packaging. OI falls under the consumer goods industry, so their business tends to be cyclical. However, they have been known to produce one out of every two bottles in the world. They have over 10,000 product offerings, so they produce tons of glass products every year.

Owens Bottle Company was founded in 1903, and later merged with Illinois Bottle Company in 1929. Thus OI has been around for a very long time. The headquarters are located in Perrysburg, Ohio but operates worldwide in 23 countries. It has seen good days, when the company was added into the Dow Jones Industrial Average and the original S&P 500. It was taken off the indexes in 1987. Only in 2009, OI was added back into the S&P 500. Not to be confused with Owens Corning (OC), a separate company that was formed as a partnership with OI and other companies.

Although packaging is not a sexy business like Tesla, or a hot trend like VR, O-I seems to make a decent amount of money. Making money doesn’t have to be sexy. Trying to be a hot company will only burn through lots of cash, ask Uber and Tesla.

The main reason that got me interested in this company is their stock price. Again, just looking at price, we see that it is reaching 52-week highs in recent days. With a low back in 2016 around $11-$12 per share. In the beginning of 2017, it was trading in a range, but started breaking out above the 50-day moving average and the 200-day moving average. An entry option is to wait for a pullback into the 50-day moving average line (around $21). It does not seem like it will pull back all the way down to the 200-day moving average line (around $19.20). However, there will be risk involved if there are any negative news, as we have seen in recent stock movements. We are seeing some drastic drops with negative earnings.


Old Industry, Old Risks

Manufacturing is a capital intensive business. With an industry so well established, and a commodity business like glass, it is hard to get high margins. It has net earnings of $49 million last quarter, and is expected announce Q2 2017 earnings in July. Here are the risks that I see involved with OI:

  1. Although cash and cash equivalents is about $312 million on hand, the amount of long term debt is more than 17 times cash on hand. The long term debt is sitting at $5.4 billion, with additional long-term liabilities at $988 million.
  2. The company was in business for a very long time, and it produced some products that turned out to be risky. Due to its past manufacture of asbestos, it is liable for lawsuits that will continue for many years, with $565 million held under liabilities.
  3. The amount inventory held seems a bit questionable, in my opinion. I guess you can say that with $1.6 billion in sales per quarter, while holding $1.0 billion in inventory translates into about 8 weeks of inventory. This may seem reasonable if the lead time to build more glass products are significant. We do not belong to this industry, so it is hard to determine if inventory can be improved through Just In Time inventory management or some other manufacturing efficiency process.

Conclusion

This is not a recommendation for anyone to invest in OI. With OI dominance in glass bottles and packaging, OI should continue to generate revenues. Growth prospects are limited, with only options of buying out the competition. Reflecting in the stock price, the stock has gone from relative recent lows of $17.5, and is now above $22. One may consider pullbacks into the rising moving averages as an entry signal. However, caution should be taken around potential earning shocks, which could lead to trend reversal.

This article covers trading financial securities, such as stocks. The world of trading often comes with rises and declines of securities, and most things do not rise or fall in a straight line. By the time this article is published, circumstances involving what we mention may have changed. Often, changes in securities can be to the detriment to the traders – seldom is it beneficial. A person should only trade with money that they’re willing to lose because losses are guaranteed. By reading this post, you agree that you’ve read our disclosure.

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