Two weeks ago, Owens-Illinois (ticker: OI ) surprised investors by cutting its earnings

guidance for the third quarter.

Owens, the world's largest maker of glass containers, expects earnings per share to fall 5%
from the year-ago period, down from previous guidance, which called for a 10% increase.
Softer beer sales in North America were cited as the main culprit. Owens will report
earnings on Oct. 28.
Since the announcement, the stock has dropped 15% to close Tuesday at $26.05, just
above a 52-week low of $26 reached earlier in the day.
The setback looks temporary, however. And investors should view the selloff as an
opportunity. Owens has an attractive global franchise, with high barriers to entry. The
company is also in the middle of an aggressive restructuring program, which could drive
earnings growth in the next year.
At a Glance
Owens-Illinois (OI)

Price:

$26.05

52-Week Range:

$35.98 $26.00

Market Value:

$4.4 billion

Est. 2014 Revenue:

$6.9 billion

Est. 2014 EPS:

$2.79

Est. 2015 EPS:

$3.22

Enterprise Value to Est. 2015

Ebitda:

5.9

Free Cash Flow Yield:

8%

Source: Thomson Reuters

At an enterprise value of 5.9 times estimated 2015 Ebitda (earnings before interest, taxes,
depreciation and amortization), the shares look inexpensive, and they sport an attractive 8%
free cash flow yield.

In the next 18 months, the shares could rise 30% or more.

Owens makes glass containers for beer, wine, hard liquor, teas, juices and
pharmaceuticals, operating 77 plants in 21 countries. The company derives about 70% of its
sales outside of North America.
Customers include leading beverage companies, such as Anheuser-Busch InBev,
Carlsberg, Diageo, Heineken, PepsiCo, and SABMiller.
This year, Owens could earn $443 million, or $2.79 a share, on revenue of $6.9 billion. In
2015, earnings could jump 15% to $3.22 a share, on flat revenues, reflecting the company's
restructuring efforts.
While Owens has seen some weakness in its businesses in Europe and Asia, North
America has presented the most trouble. The business is heavily reliant on the large beer
makers, whose volumes have been hurt by fewer beer drinkers. Craft beer and wine
demand, by contrast, has been growing, but not enough to offset the reduced beer volumes.
Owens' North American volumes could fall about 2% in the quarter, which ended in
September, compared to a year ago. For the full year, North American volumes are likely to
remain flat.
Owens recently appointed Andres Lopez, the president of South American operations,
where the company has racked up good results, to also head the North American unit.
Lopez may work to transition some beer production to wine, which would improve
performance.
Owens is making solid progress on its multiyear restructuring program. The company has
been updating its plants to improve efficiency, making headcount reductions, and keeping a
tighter lid on expenditures. Management is on track to realize its target of $155 million in
costs savings by 2015.
According to Christopher Manuel, an analyst at Wells Fargo, the restructuring could drive
operating margins from 11.9% in 2013 to 13.8% in 2016.
The actions are expected to lift free cash flow by about 15% to $400 million in 2015.
Management has been using most of its free cash to pay down debt, but given the
company's improved balance sheet, it intends to direct more toward share buybacks.

Next year, Owens will spend at least $100 million on buybacks, equal to 25% of its
estimated free cash flow. Analyst Manuel sees that percentage increasing to between 40%
and 60% over the next 18 months, which will likely boost earnings per share.
Manuel values Owens-Illinois' stock in the high $30s.
E-mail: editors@barrons.com