Bank Of America Upgrades Owens-Illinois On Vitro Deal

In a report published Monday, Bank of America Merrill Lynch analysts upgraded the rating on

from Underperform to Neutral, with a price target of $28, following the company's earnings growth and capital allocation for buybacks. The analysts also expressed their optimism regarding the company's proposed acquisition of Vitro, SAB de CV, a food and beverage glass container business. "As such, O-I's ability to grow volumes and earnings through Vitro should allow the stock to keep pace with the market after its strong trading day on May 13," the analysts said. Although there might be a rise in future capital intensity due to the deal, the analysts believe that Vitro is relatively well positioned and well capitalized to generate EBITDA margins of over 29 percent. In addition, the acquisition is likely to spur growth for Owens-Illinois, especially in terms of volume growth via exposure to the Mexican food and beverage glass market. "We don't expect any regulatory issues, but would point out some risks around potential pack mix shifts and price erosion over time, as well as the need for additional capex over time," the analysts added. While the Mexican glass market is expected to grow at a rate of 23 percent per annum over the next few years, Owens-Illionois' capital allocation for buybacks and possible a "modest" dividend in 2017 are encouraging.