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080131 Deutsche Bank Report - OI's 4Q in 100 Words

Deutsche Bank - Equity Research

O-I  {Ticker: OI, Closing Price: USD 50.60, Target Price: USD 65.00, Recommendation: Buy}.

* We were wrong; Upgrading O-I to a Buy

Hard not to be more optimistic.  OI showing impressive incremental gains & gaining traction w/ pricing initiatives.  We're boosting our rating back to BUY and boosting our price target to $65.  We are increasing our FY08 estimate to $4.25 from $2.95 and our FY09 estimate to $4.75 from $3.40.

* 4Q EPS well above estimates

Reported EPS of $1.00.  DB @ $0.42, FC @ $0.44.  Sales +15.2% to $1.957B (10% FX, c.6% price/mix, & vol. down -1%).  Excluding restructuring & asbestos charges, EBIT = $283.7MM (14.5%), up significantly y/y, 4Q06 = 142.7MM (8.4%).   In 4Q, we note that O-I recorded a $54MM benefit (c.$0.24 after-tax) for improvement in “warehouse, delivery and other costs”, of which about $22MM should be applied to 2Q and 3Q.

* Key Issues

1) Strong contribution from FX, price/mix, 2) Cost savings up & operating exp. down y/y,  3) FCF in 4Q to $26.8MM in 4Q07 vs.

$126.1MM in 4Q06. FY07 FCF = $332.6MM vs. $379.3MM in FY06, 4) Asbestos related payments were $347MM in '07 vs. $162.5MM in '06.

* Valuation/Risks

Our $65 target price is based on a modified DCF analysis. We use an 8.0% cost of capital and 4.5% risk free rate (beta of 1.2).  We believe the business is relatively stable, thus our nominal growth rate of 2.0% is roughly equal to inflation. Downside risks include rising natural gas prices, declining sales volume and failure to execute new pricing strategies, increasing asbestos charges and economic weakness.