Silgan: Will Momentum In Closures Outweigh Higher Costs?

On Jun 2, 2016, we issued an updated research report on Silgan Holdings Inc. (NASDAQ:SLGN) . Incremental costs from its footprint optimization programs, high debt and foreign exchange volatility remain concerns for this manufacturer of consumer goods packaging products. However, strategic acquisitions, footprint optimization programs across each of its businesses, continued momentum in the Closure business and further share repurchases will bode well for the long run.

Silgan Holdings reported a 17% year-over-year slump in first-quarter 2016 earnings to 45 cents per share. Unfavorable foreign currency translations, pass-through of lower raw material costs, logistical inefficiencies and incremental costs related to the footprint optimization programs hurt earnings in the quarter.

For 2016, the company has maintained its earnings per share guidance in the range of $2.80 to $3.00. Net sales in the Closures business will increase on the back of higher unit volumes. Segment income from operations is expected to surpass the record operating income in 2015 primarily as a result of higher unit volumes and improved manufacturing efficiencies. The inflation in wages and certain other costs and the favorable impact in 2015 from the lagged pass through of lower resin costs — not expected to recur in 2016 — will partially counter the impact. For the second quarter, Silgan anticipates earnings per share in the range of 50 cents to 60 cents.

Last year was the beginning of a transition period for Silgan. The company undertook several footprint optimization programs across all its businesses targeted to improve efficiencies, reduce costs and strengthen its competitive position in each of the markets.

However, in the plastics business, the complexity and magnitude of the ongoing optimization program led to significantly higher costs in 2015 and is expected to do so in 2016 as well. Moreover, ongoing logistical costs in the metal food can business, prior to the qualification of the new plant, along with the ongoing transition and start-up costs will hurt margins for the next few quarters.

The company continues to bolster profitability through strategic acquisitions and expansion of its footprint, notably that of metal container manufacturing assets of Van Can and the Portola Packaging acquisition.

As Silgan’s international operations generated approximately 23% of its consolidated net sales in 2015, unfavorable foreign currency translation is likely to affect results. The company had a high debt-to-capitalization ratio of 73% as of Mar 31, 2016, which is also a matter of concern. The company expects interest expense to increase slightly in 2016 due to higher weighted average interest rates, partially offset by lower average outstanding borrowings. This will hurt margins too.

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

Key Picks from the Sector

Some better-ranked stocks include Sonoco Products Co. (NYSE:SON) , Crown Holdings Inc. (NYSE:CCK) and Berry Plastics Group, Inc. (NYSE:BERY) . All of these stocks hold a Zacks Rank #2 (Buy).