Tuesday, April 17, 2018

Four Rs in Plastics Solution

The most recent post “Plastic Contagion” on April 13th outlines a few environmental and health problems associated with plastic.  The prospect of microplastics embedded in our food and not just as material for the lunch plate should be enough to encourage everyone to look for a solution to the world’s plastic problem.  For those who are not very clever on their own, the American Chemistry Council advocates four actions to deal with plastic:  Reduce, Reuse, Recycle, and Recover. 
Investors have a few choices if they want to their capital decisions to support solutions rather than just add to the plastics problem.  In this post we begin looking at the Chemistry Councils four Rs and companies that are involved in reducing plastics use.
Of course, reducing plastics usage is more about behavior change than a new product or an alternative process.  Reef Relief offers fifty-one ways to reduce plastic use.  Bringing re-usable sacks and containers, even coffee cups, to stores is a big part of the advice.  Glass containers are also mentioned in several of the steps. 
Image result for glass containers image
Glass has been preferred packaging for decades.  It is durable, non-porous and heat tolerant.  Glass preserves flavor.  It is non-reactive and safe to use over and over.  Glass is made from natural ingredients:  sand, limestone and soda ash.  It will not break down into harmful chemicals in water or soil.  Expect the industry to benefit from the reverse substitution of glass of all types for products and components currently made from plastic. 
Glass producers can be found the world over.   Leading the field is Compagnie de Saint-Gobain, S.A. (SGO:  Paris) with its mix of flat glass and tubing for the building and vehicle industries.  The stock is valued at 11.2 times expected 2018 earnings and offers a forward dividend yield of 2.98%.   Corning, Inc. (GLW:  NYSE) is a manufacturer of specialty glasses and ceramics for life sciences, display technologies and optical communications sectors.  Trading in the U.S. equity market, Corning commands a 14.1 multiple times forward earnings.  At the current price the forward dividend yield is 2.6%.
There are a number of other large competitors in the glass industry, most making their way with flat glass and industrial ceramics products.  Glass containers are the work of the sector’s second tier. 
Mexico’s Vitro S.A.B. de C.V. (VITROA:  MX) makes flat glass as well, but also has a line of glass containers for cosmetic, fragrance and pharmaceutical customers.  It is a good business for Vitro, which reported $2.1 billion in total sales in the year 2017, producing $200 million in net income on the back of a 14.1% operating margin.   The stock trades at 8.2 times trailing earnings, which even in the Mexico market appears undervalued.

Next in the plastics series will be a look at companies involved in recycling and recovery of plastics.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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