Ball Corp, Silgan Holdings Downgraded As Industry Concerns Mount

Rigid packaging companies Ball Corporation BLL and Silgan Holdings Inc. SLGN may suffer due to worsening industry fundamentals and their valuations remain unattractive, according to KeyBanc Capital Markets.

The Analyst

KeyBanc Capital Markets analyst Adam Josephson downgraded shares of both Ball Corporation and Silgan Holdings from Sector Weight to Underweight. The analyst's price targets for Ball Corporation and Silgan are $36 and $25, respectively.

The Thesis

KeyBanc is below-consensus on both companies for 2018, Josephsonn said in a Thursday note. (See Josephson's track record here.) 

Ball and Silgan have significant leverage, reducing the possibility of M&A or share repurchase in the near term, and both are trading close to all-time high multiples, the analyst said. 

With Ball Corporation, Josephson said the company was forced to reduce 2017 EBITDA guidance twice this year due to challenging industry fundamentals and other factors. Going by recent and pending beverage can capacity additions in Brazil, Europe and the U.S. — and weak beer and soda demand in the U.S. — KeyBanc said industry fundamentals are unlikely to improve in the foreseeable future.

The analyst said he expects much of the cost synergies arising out of Ball Corporation's acquisition of Rexam Ltd (ADR) REXMY to be offset by industry pressures.

Meanwhile, Silgan could suffer due to the deteriorating fundamentals in the U.S. food can market, which is seeing overcapacity and flat-to-declining demand, Josephson said. Campbell Soup Company CPB, one of Silgan's three largest customers, is seeing its soup business come under tremendous pressure, the analyst said. 

Josephson noted that Silgan's Plastic business has experienced periodic difficulty in recent years.

The analyst said he expects shares of both companies to underperform peers in 2018.

"Potential U.S. food can industry consolidation could help matters, but we have no idea if or when that will happen." 

The Price Action

Ball Corporation shares are up 7.5 percent year-to-date, while Silgan has gained over 13 percent in the same timeframe.

At the time of writing, Ball shares were slipping 2.60 percent to $39.75 and Silgan was down a steeper 3.35 percent to $28.02.

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