Balanced Risk-Reward for Silgan - Analyst Blog

On Jun 2, 2014, we issued an updated research report on the manufacturer of consumer goods packaging products Silgan Holdings Inc. SLGN. While the company anticipates gain from acquisitions and expansion initiatives, it faces persistent challenges from pricing pressure, volatile energy costs and economic instability.

Silgan reported record earnings in the first quarter of 2014. Sales also improved in the quarter driven by increased sales in all segments. For 2014, Silgan expects adjusted earnings per share in the range of $3.10 to $3.30. The estimate represents an increase of 13% to 20% from the prior year, reflecting improvement in the Closures business.

The company continues to bolster its profitability through strategic acquisitions and geographic expansion. The acquisition of Portola Packaging in Oct 2013 resulted in improved first quarter results. The Closures segment's revenue improved 32.7% year over year primarily due to increase in unit volumes largely attributable to the inclusion of Portola Packaging. This integration will also aid growth in 2014.

Silgan's continued focus on its Can Vision 2020 program will enhance its competitive advantage in the metal packaging for food category. The Can Vision 2020 program aims to reduce the overall supply chain cost of the food can. Silgan will also benefit from geographic expansion as the company established a two-year program to extend long-term contracts.

In addition, Silgan authorized repurchases of up to $300 million of its common stock on Mar 3. This authorization is effective through Dec 31, 2019. The company also raised its quarterly dividend by 7.1% to 15 cents per share on the same day. Silgan paid $9.7 million as dividends in the first quarter ended March 31, 2014.

Share repurchases and dividend distribution will drive Silgan's growth in the near term. However, pricing pressure in North American food cans from competitors' capacity additions, continued conversion of food cans to other forms of packaging and higher resin costs will hurt growth.

Silgan's cost of production is sensitive to energy costs, such as natural gas and electricity. Energy prices, oil and natural gas prices in particular, have been volatile in recent years, with a corresponding effect on production costs. Cost of production increased 6% year over year in the first quarter. The increasing cost may affect the company's profitability in the future.

Likewise, adverse weather conditions and present economic instability in Europe also remain areas of concern for the company.

Currently, Silgan has a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks worth considering at the moment include Crown Holdings Inc. CCK, Graphic Packaging Holding Company GPK and AO Smith Corp. AOS. While Crown Holdings has a Zacks Rank #1 (Strong Buy), Graphic Packaging and AO Smith carry a Zacks Rank #2 (Buy).

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SILGAN HOLDINGS SLGN: Free Stock Analysis Report
 
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