On Oct 18, we maintained our Neutral recommendation on
Silgan Holdings Inc.
) based on expected benefits from its successful acquisitions,
increasing productivity and cost reduction initiatives. However,
soft demand in Europe, a high debt-to-capitalization ratio and
political volatility in various international regions remain the
headwinds for this manufacturer of metal and plastic consumer
goods packaging products.
Silgan Holdings' second-quarter 2013 earnings increased 15% year
over year to 63 cents per share, driven by solid operating
performance by the metal and plastic container businesses. Total
revenue increased 7% year over year to $880 million.
Silgan has managed to increase its overall market share from
approximately 10% in 1987 to half of the U.S. metal food
container market in 2012 on the back of accretive acquisitions
and organic growth.The company's acquisition of Rexam's
high-barrier food business in 2012 will not only add to its
growth platform through an adjacent product/technology, but also
augment its scope for international expansion.
Silgan recently entered into an agreement to acquire Portola
Packaging for $266 million. The acquisition will enhance Silgan's
Closure business and also enable Silgan to expand its plastics
closures offerings in Europe. The acquisition is expected to be
accretive to 2013 earnings.
Silgan Holdings continues to enhance profitability through
productivity and cost reduction opportunities. Silgan is funding
two major initiatives to promote the food can as a sustainable
long-term packaging solution for shelf-stable products - Can
Vision 2020 and an industry-wide campaign through the Can
Manufacturing Institute. The Can Vision 2020 program aims to
reduce the overall supply chain cost of the food can.
According to the company, there exists long-term cost
reduction opportunities of $200 million across the supply chain.
The second initiative in collaboration with the Can Manufacturing
Institute is intended to improve consumers' perception and
increase awareness regarding the advantages of the food can
compared with other forms of food preservation/delivery.
In the second quarter, Silgan's metal food can volumes were up
approximately 10%, outperforming the industry growth (up nearly
7%). Volume growth in the United States, principally in the soup
and pet food markets, growth from its new plants in Eastern
Europe, and the inclusion of sales from the operations in Turkey
that the company acquired in July 2012 led to the improvement.
With improving weather, management expects a solid fruit and
vegetable pack season, and volumes are expected to improve
overall in 2013.
On the flipside, 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. As the European conditions are expected to
remain challenging, we forecast results to be affected over the
next few quarters.
Furthermore, Silgan Holdings' high debt-to-capitalization ratio
is a concern. As of Sept 30, 2013, its debt-to-capitalization
ratio was 77%. Its strategy to take up debt to finance
acquisitions will further aggravate the company's debt position.
Silgan's metal can and closure businesses were negatively
affected in the second quarter by economic uncertainty caused by
the ongoing political instability in the Middle East and
Venezuela. Thus, Silgan trimmed its fiscal 2013 guidance for
adjusted earnings per share to $3.00 to $3.15 from the previous
range of $3.05 to $3.20.
For the third quarter, adjusted earnings per share are
expected to range from $1.25 to $1.35, based on the normal but
slightly delayed distribution of fruit and vegetable pack season.
However, political volatility in various international regions
could hurt earnings.
BOISE INC (BZ): Free Stock Analysis Report
MOBILE MINI INC (MINI): Free Stock Analysis
PACKAGING CORP (PKG): Free Stock Analysis
SILGAN HOLDINGS (SLGN): Free Stock Analysis
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