Silgan (SLGN) Rides On Acquisitions, Material Costs High
Zacks Investment Research | Jun 18, 2019 10:10PM ET
On Jun 18, we issued an updated research report on Silgan Holdings Inc. (NASDAQ:SLGN) . The company is poised to gain from acquisitions, manufacturing efficiencies and higher unit volumes in both the closures and plastic container segments. However, lower volumes in the metal container business and inflated freight and material costs remain near-term concerns.
Acquisitions: A Key Catalyst
Since its inception, Silgan Holdings acquired 35 businesses. Backed by acquisitions and organic growth, the company has increased share in the metal food container market in the United States from 10% in 1987 to slightly more than half of the market in 2018. Through buyouts, it has become a leading global manufacturer of closures for food, beverage, health care, garden, personal care, home and beauty products, with net sales of $1.46 billion in 2018, a sevenfold increase since 2003. The company has also improved market position in the plastic container business since 1987, with net sales increasing sevenfold to $614.1 million in 2018.
Silgan Holdings acquired the specialty closures and dispensing systems operations of WestRock Company (NYSE:WRK) in 2017, now operating under the name Silgan Dispensing Systems (SDS). The company’s Closures business (which contributed 35% to revenues in first-quarter 2019) will continue to benefit from the acquisition of Dispensing Systems, including synergies.
Manufacturing Efficiency & Lower Tax to Aid 2019 Results
Silgan Holdings expects adjusted earnings per share in the range of $2.10-$2.20 for 2019. The company had reported earnings per share of $2.08 in 2018. It also provided adjusted earnings per share guidance at 51 to 56 cents for the second quarter of 2019. In the second quarter of 2018, the company had reported earnings per share of 52 cents.
The company continually evaluates cost reduction opportunities across each of its businesses, including rationalizations of its existing facilities through plant closures and downsizings, which in turn will aid margins. Continued benefits from manufacturing efficiencies and higher unit volumes will lead to improved operating profits for the Closures and the Plastic Container segments in 2019.
Silgan Holdings anticipates the effective tax rate to be 24% in 2019, in line with 2018, excluding certain effective tax-rate adjustments. The effective tax rate reflects the impact of the U.S. Tax Cuts and Jobs Act of 2017. This recent tax reform is expected to reduce cash obligations for existing net deferred tax liabilities and allow greater flexibility to utilize global cash to invest in optimal locations.
Capital Expenditure to Drive Growth
Silgan Holdings reported capital expenditures of around $191 million in 2018, compared with $175 million in 2017. For 2019, the company expects capital expenditures of $200 million. The company also projects free cash flow guidance at $275 million for 2019.
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Lower Volume in Metal Container Segment Remains a Woe
Unit volumes in the metal container business (Silgan’s largest business) are expected to decline in 2019 owing to customer pre-buy activity at the end of 2018 in anticipation of significant tinplate steel inflation. Further, part of the volume decline can be attributed to continuation of an inventory and portfolio management program at a certain customer.
Inflated Costs & High Debt Remain Headwinds
Tariff on steel and aluminum prices imposed by the U.S. government led to rise in material costs. The company expects inflated material and freight costs to continue to impact results in 2019.
As of Mar 31, 2019, Silgan Holdings’ debt-to-capital ratio remains high at 70.13%, which is a concerning factor.
Share Price Performance
Over the past year, shares of Silgan Holdings have gained 11.0% underperforming the Zacks Investment Research
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