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Silgan (SLGN) Shares Up 22% YTD: What's Driving the Rally?

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Shares of Silgan Holdings Inc. (SLGN - Free Report) have been gaining on solid demand for food, beverage and consumer health and personal care products amid the coronavirus pandemic. Acquisitions, savings from cost reduction actions and better-than-expected second-quarter earnings performance have also contributed to the price performance. The stock has gained 21.6% year to date, outperforming the industry’s growth of 13.5%.

The company has a market cap of $4.19 billion. It has an expected long-term earnings per share growth rate of 5%, in line with the industry. The company beat estimates in two of the trailing four quarters, while matching the same twice. It has a trailing four-quarter earnings surprise of 12.81%, on average.

Let’s delve deeper and analyze the reasons behind the company’s impressive price performance and find out if there is room for further appreciation.

Upbeat Q2 Results

Silgan reported second-quarter 2020 adjusted earnings of 85 cents per share, comfortably beating the Zacks Consensus Estimate of 63 cents. Further, the figure improved 54.5% year over year. Total revenues increased 7.6% year over year to $1,176.5 million on higher sales across its business segments. The top line also surpassed the Zacks Consensus Estimate of $1,116 million.

Healthy Growth Projections

The Zacks Consensus Estimate for Silgan’s current-year earnings per share is pegged at $2.78, indicating year-over-year growth of 28.7%. The same has moved north by 15% over the past 30 days.

Driving Factors

Backed by the surge in demand for vital products like food, beverage and consumer health and personal care products amid the coronavirus crisis, Silgan has been witnessing strong volumes in all of its segments. Notably, all of its global production facilities have remained open, and each of the businesses are operating at peak productivity levels.

In June, Silgan closed the previously announced acquisition of Albea’s dispensing business. It is a strategic fit for the closures business. This buyout is likely to strengthen its position in the dispensing markets. The company expects to realize operational cost synergies of $20 million, on an annual run rate basis, within 18 months following the acquisition. These synergies would be achieved primarily through reductions in general and administrative expenses, procurement savings and manufacturing efficiencies. This buyout is expected to be modestly boost Silgan’s earnings in 2020. Further, it is anticipated to become more accretive as synergies are phased in over the next 18 months and customer buying patterns for the beauty and personal care markets return to more normal levels. Silgan Holdings also acquired Cobra Plastics, Inc., in a bid to expand closures franchise into new markets.

Backed by strong performance in the first half of 2020, ongoing strength in demand and the inclusion of the dispensing operations acquired from Albéa, the company has raised earnings guidance for the full year. For the third quarter, Silgan expects adjusted earnings per share in the range of 55 to 70 cents. The mid-point of the range indicates year-over-year growth of 13.6%. For 2020, adjusted earnings per share guidance is at $2.70 to $2.85. The mid-point of the range indicates an increase of 28% over earnings of $2.16 in 2019. Silgan has also increased free cash flow guidance for 2020 from approximately $275 million to approximately $330 million.

Silgan continually evaluates cost reduction opportunities across each of its businesses, including rationalizations of existing facilities through plant closures and downsizings. It has  a disciplined approach to identify opportunities that generate attractive cash returns. In sync with this, Silgan had announced an expanded footprint optimization plan in the metal container business. It is expected to reduce capacity by more than 0.5 billion units and continue to drive further cost reductions.

Zacks Rank & Other Stocks to Consider

Silgan currently carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Some other top-ranked stocks in the Industrial Products sector include Astec Industries, Inc. (ASTE - Free Report) , IIVI Incorporated and SiteOne Landscape Supply, Inc. (SITE - Free Report) . All of these stocks sport a Zacks Rank #1.

Astec has a projected earnings growth rate of 13.6% for 2020. The company’s shares have gained 26% so far this year.

IIVI has an estimated earnings growth rate of 29% for the ongoing year. The company’s shares have rallied 37% in the past year.

SiteOne Landscape has an expected earnings growth rate of 15.4% for the current year. The stock has appreciated 41% year to date.

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