On Wednesday, JPMorgan upgraded Crown Holdings (NYSE:CCK), a major player in the packaging industry, from Neutral to Overweight, albeit with a slight reduction in the price target to $85 from $86. The financial institution identified Crown Holdings as a strong free cash flow generator and highlighted its potential for a favorable risk/reward balance given the current market conditions.
Crown Holdings has shifted its business strategy away from viewing the beverage can market as a growth sector. Instead, the company has significantly reduced its capital expenditures, positioning itself as a robust generator of free cash. JPMorgan anticipates Crown’s free cash yield to be around 7.7% for 2024 and 8% for 2025, based on their base case scenario. Crown's free cash flow yield for 2023 is projected at 7.2% at the present share price.
The market for beverage cans experienced a contraction in 2023 due to consumers facing high grocery prices. As consumer product companies continue to raise prices, the analyst suggests that there is no immediate relief from these market conditions. However, should consumer companies shift their strategies to focus on volume, benefits could accrue to beverage can manufacturers like Crown.
Investors in Crown Holdings could capture an approximately 8% free cash flow yield while waiting for a potential upturn in the aluminum beverage can industry. Such a shift could lead to an increase in Crown's rate of earnings growth and an improvement in its trading multiples. The analyst also noted that Crown Holdings currently trades at a discount compared to its peer, Ball Corporation (NYSE:BALL), which trades at 11.0x and 11.7x EV/EBITDA for 2024 and 2025 estimates, respectively, compared to Crown's 8.3x and 8.0x.
InvestingPro Insights
In light of JPMorgan's recent upgrade of Crown Holdings, the InvestingPro platform offers additional insights that could be instrumental for investors considering this stock. Crown Holdings has demonstrated a commitment to shareholder returns, as evidenced by its consistent dividend increases over the past three years. This aligns with JPMorgan's view of the company as a strong free cash flow generator, a sentiment further supported by the InvestingPro data showing a robust free cash flow yield.
Moreover, the recent pullback in Crown Holdings' stock price, which has seen a significant decline over the last week, may present a buying opportunity. The Relative Strength Index (RSI) suggests the stock is currently in oversold territory, indicating that the stock's downward momentum may be overextended.
InvestingPro data highlights a market capitalization of $9.18 billion, with a price-to-earnings (P/E) ratio of 23.49. When adjusted for the last twelve months as of Q4 2023, the P/E ratio becomes even more attractive at 17.69. Additionally, the company's revenue for the same period stands at $12.01 billion, despite a slight revenue decline of 7.21%.
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