On July 5, we maintained our Neutral recommendation on
Silgan Holdings Inc.
) based on expected benefits from its successful acquisitions,
increasing productivity and cost reduction initiatives as well as
decline in resin prices. However, soft demand in Europe, a high
debt-to-capitalization ratio and lower volume expectation remain
concerns for this manufacturer of metal and plastic consumer
goods packaging products.
Silgan Holdings' first-quarter 2013 earnings declined 10% year
over year to 46 cents per share, due to higher resin costs and
macroeconomic conditions in Europe. Total revenue increased 4%
year over year to $796 million.
Resin costs were a headwind to both the Plastics and Closures
segments in the first quarter. However, in the second half of
fiscal 2013, resin headwinds will turn into tailwinds due to the
recent decline in polypropylene prices.
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. In 2013, Silgan is
expected to witness improvement in the core metal food can
business from volume growth and benefits from lean manufacturing
initiatives as well as continued profit improvement in the legacy
plastics business from greater operational efficiencies.
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.
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. With the European conditions expected to
remain challenging, we expect results to be affected over the
next few quarters.
Furthermore, Silgan Holdings' high debt-to-capitalization ratio
is a concern. As of Mar 31, 2013, its debt-to-capitalization
ratio was 78%. Its strategy to take up debt to finance
acquisitions will further aggravate the company's debt position.
Other Stocks to Consider
Other stocks in the industry that are currently performing well
and have a good visibility include
Mobile Mini, Inc.
), with a Zacks Rank #1 (Strong Buy), and
Berry Plastics Group, Inc.
), both carrying a Zacks Rank # 2 (Buy).
BERRY PLASTICS (BERY): Free Stock Analysis
MOBILE MINI INC (MINI): Free Stock Analysis
ROCK-TENN CO (RKT): Free Stock Analysis
SILGAN HOLDINGS (SLGN): Free Stock Analysis
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