Owens Illinois (OI) reported first quarter EPS of $1.08, above our estimate of $0.80, on account of favorable currency translation, a higher-than-expected price recovery of manufacturing inflation, and lower net interest expenses. The company saw double-digit glass container revenue growth across all geographic markets, except North America. The company derived the bulk of its revenue gains from currency translation and price recovery rather than volume.
Owens Illinois reported first quarter EPS of $1.08, above our estimate of $0.80, on account of favorable currency translation in Europe and Asia Pacific *($0.14 of earnings accretion versus our expectations of $0.09), a higher-than-expected price recovery of manufacturing inflation *($0.33 versus $0.12), and lower-than-anticipated net interest expenses *($0.09 versus $0.07).
During the first quarter, the company continued to focus on profitability over market share. Management raised product prices to protect profit margins, but it came at the expense of lower volume (-$49 million).
On a year-over-year basis, first quarter price and product mix added $119 million to profits, which more than offset $55 million in cost inflation. A lower tax rate added almost $0.11 to earnings; net interest expense added $0.19 to earnings, and lower retained corporate costs added $0.12.
As OI pays down total debt, we expect further earnings gains from a lower interest expense. We believe OI will continue to focus on profitability over market share. We rate the shares as Hold and our target price is $58.50, which is 13x our FY08 EPS estimate of $4.51.
*All component earnings gains are reported on an incremental basis, which is the net growth off the first quarter of FY07.
Read the analyst note on OI.
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