Danilo Santiago presented his in-depth investment thesis on Owens-Illinois (NYSE: OI) at Best Ideas 2017.
Owens-Illinois is a leading manufacturer of glass containers for beverages and food, with 80 facilities around the globe. The company is the #1 player in Europe, North America, Australia/New Zealand, and Latin America. Over the past decade, OI has transformed itself, selling all its plastic container facilities while gathering a significant presence in glass container manufacturing. But why glass? That was a strategic decision: Although thousands of years old, glass is still the most superior container for beverages and food. Glass is the most neutral and natural of packaging materials. It is as inert as packaging gets. Therefore, no chemical residues are left on the beverage (think of high-quality wine) or food (think baby-food) when a glass container is used. However, the transformational journey endured by OI left some marks. The P&L and balance sheet are difficult to follow, due to all the acquisitions and divestitures. The company also has an underfunded defined-benefit pension plan that will consume a significant amount of cash flow. Due to a former business unit, which operated from 1948-1958, (unknowingly) selling products containing asbestos (in today’s money, total sales were close to $360 million), the company has to pay hundreds of millions in indemnity every year. Since an initial liability was established in 1993, the company has paid close to $4.4. billion. Although it is possible to make reasonable assumptions about the remaining payments, it is an issue that might scare investors. Lastly, the company has a high (but not excessive) amount of debt. In summary, although OI’s core business is simple and stable, the corporation is complex. This is probably why OI is the only company – among ~60 continuously followed by Danilo – that is below its base-case fair-value, during what appears to be a peak margin/sales part of the economic cycle.
About the instructor:
Danilo Santiago is a founding partner of Rational Asset Management, a long-short hedge fund. The fund operations started in April 2008, focusing on publicly traded liquid US equities. Rational’s core strength is its proprietary company analyses – differently from most funds, Rational’s knowledge base (i.e. the group of companies and industries that are continuously followed) is quasi- static, which provides the manager with an extra edge when triggering a new long/short position. Mr. Santiago has an MBA from Columbia Business School (CBS ‘01) and a bachelor degree in Electrical Engineer from the University of São Paulo (class of 1994). Before founding Rational, Mr. Santiago worked for three years on a multi-billion dollars, fundamental focused hedge fund in New York City. Prior to that Mr. Santiago spent six years at McKinsey & Co, the majority of which at the Corporate Finance Practice, also in New York City.
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