We maintain our Neutral recommendation on
Silgan Holdings Inc.
( SLGN). The stock retains a short-term Zacks #3 (Hold rating).
Silgan Holdings' second quarter revenues dipped 0.1% to $822
million but EPS increased 4% to 55 cents. However, the
company lagged the Zacks Consensus Estimate on both lines.
Since its inception, Silgan Holdings' growth has primarily been
driven by acquisitions. Apart from the metal food container
business, Silgan strengthened its position in the plastic container
and closures businesses through strategic acquisitions. With the
acquisition of the metal container operations of Vogel & Noot
Holding last year, the company emerged as the leading manufacturer
of metal containers in Europe. The company's recent acquisition of
Rexam's high-barrier food business will not only add to its growth
platform through an adjacent product/technology but also augment
its scope for international expansion. The acquisition is expected
to be accretive to 2013 earnings.
Silgan Holdings continues to enhance profitability through
productivity and cost reduction opportunities. Consistent with its
continuing efforts of streamlining its plant operations, reducing
operating costs and better match supply with geographic demand,
Silgan has closed three metal container manufacturing facilities,
one closures manufacturing facility and two plastic container
manufacturing facilities since 2007. Furthermore in 2012, Silgan
announced plans to close one more plastic container manufacturing
facility, and laid off more employees in its closures business.
The Plastics Container segment posted a strong quarter helped by
strong volumes, lower resin prices, favorable mix and cost
reductions. We expect margins to improve further in 2013 with the
addition of Rexam's high-barrier food business.
On the flipside, Silgan's metal container segment's volumes in
the second quarter were negatively affected by a slow start to the
vegetable pack, presumably owing to the heat wave and drought
affecting the Midwest. In the quarter, peas and green beans were
harvested later than anticipated because of weather issues, and
resulted in some order shifting to the second half of 2012.
Although other crops are following a somewhat normal pattern,
though delayed, the main concern remains regarding sweet corn. It
represents approximately 5% of total food can volumes and is
cultivated in the upper Midwest (Minnesota and Wisconsin) and is
largely irrigated, so the primary risk to the crop is continued
extreme heat. If the sweet corn crop harvest is not as per
expectations, it might affect Silgan's earnings.
Silgan's exposure to Europe has increased following its Vogel
& Noot acquisition and expansion of the Closures segment in the
region, accounting for almost 50% of the segment's revenues. In
Europe, weakening demand and softer pricing has emerged as a result
of the ongoing economic instability in the region. With the
European conditions expected to remain challenging over the next
few quarters, we expect additional pricing pressure.
Furthermore, Silgan Holdings' high debt-to-capitalization ratio
is a concern. As of June 30, 2012, its debt-to-capitalization ratio
was at 73%. Its strategy to leverage for acquisitions will further
aggravate the company's debt position.
Silgan Holdings Inc. is one of the leading North American
manufacturers of metal and plastic consumer goods packaging
products. Its products are used in a wide variety of end-markets.
It is the largest metal-container supplier for food products in
North America. The company has 82 manufacturing plants throughout
North and South America, Europe, and Asia. Silgan competes with
companies like
Ball Corporation
(
BLL
) and
Crown Holding Inc.
(
CCK
).
BALL CORP (BLL): Free Stock Analysis Report
CROWN HLDGS INC (CCK): Free Stock Analysis
Report
SILGAN HOLDINGS (SLGN): Free Stock Analysis
Report
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