O-I Glass Earnings: Lackluster Results Offset by Optimistic Long-Term Guidance; Shares Still Cheap

Narrow-moat-rated O-I Glass reported mixed results in the second quarter that were largely in line with our expectations. Net sales fell 8.5% year over year as both segments experienced declines while segment operating margin declined over 350 basis points to 13.5%. The margin contraction was largely due to O-I’s European business that has begun to normalize from record-high results last year. While inventory destocking headwinds moderated in the quarter, soft consumer consumption led to a 4.5% decrease in volume in the quarter. To address this, management announced additional curtailments would be taken in the third quarter, which could account for as much as 15% of total capacity. While this will weigh on near-term results, inventory reduction and removal of high-cost capacity should drive long-term margin expansion. We've maintained our fair value estimate of $22 per share as a decrease in near-term profitability was offset by increases in our long-term forecast.