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Silgan Remains at Neutral

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On Oct 18, we maintained our Neutral recommendation on Silgan Holdings Inc. (SLGN - Free Report) based on expected benefits from its successful acquisitions, increasing productivity and cost reduction initiatives. However, soft demand in Europe, a high debt-to-capitalization ratio and political volatility in various international regions remain the headwinds for this manufacturer of metal and plastic consumer goods packaging products.

Why Reiterated?

Silgan Holdings’ second-quarter 2013 earnings increased 15% year over year to 63 cents per share, driven by solid operating performance by the metal and plastic container businesses. Total revenue increased 7% year over year to $880 million.

Silgan has managed to increase its overall market share from approximately 10% in 1987 to half of the U.S. metal food container market in 2012 on the back of accretive acquisitions and organic growth.The company’s acquisition of Rexam’s high-barrier food business in 2012 will not only add to its growth platform through an adjacent product/technology, but also augment its scope for international expansion.

Silgan recently entered into an agreement to acquire Portola Packaging for $266 million. The acquisition will enhance Silgan’s Closure business and also enable Silgan to expand its plastics closures offerings in Europe. The acquisition is expected to be accretive to 2013 earnings.

Silgan Holdings continues to enhance profitability through productivity and cost reduction opportunities. Silgan is funding two major initiatives to promote the food can as a sustainable long-term packaging solution for shelf-stable products - Can Vision 2020 and an industry-wide campaign through the Can Manufacturing Institute. The Can Vision 2020 program aims to reduce the overall supply chain cost of the food can.

According to the company, there exists long-term cost reduction opportunities of $200 million across the supply chain. The second initiative in collaboration with the Can Manufacturing Institute is intended to improve consumers’ perception and increase awareness regarding the advantages of the food can compared with  other forms of food preservation/delivery.

In the second quarter, Silgan’s metal food can volumes were up approximately 10%, outperforming the industry growth (up nearly 7%). Volume growth in the United States, principally in the soup and pet food markets, growth from its new plants in Eastern Europe, and the inclusion of sales from the operations in Turkey that the company acquired in July 2012 led to the improvement. With improving weather, management expects a solid fruit and vegetable pack season, and volumes are expected to improve overall in 2013.
On the flipside, Silgan’s exposure to Europe has increased following its Vogel & Noot acquisition and expansion of the Closures segment in the region, accounting for almost 50% of the segment’s revenues. As the European conditions are expected to remain challenging, we forecast results to be affected over the next few quarters.

Furthermore, Silgan Holdings’ high debt-to-capitalization ratio is a concern. As of Sept 30, 2013, its debt-to-capitalization ratio was 77%. Its strategy to take up debt to finance acquisitions will further aggravate the company’s debt position.

Silgan’s metal can and closure businesses were negatively affected in the second quarter by economic uncertainty caused by the ongoing political instability in the Middle East and Venezuela. Thus, Silgan trimmed its fiscal 2013 guidance for adjusted earnings per share to $3.00 to $3.15 from the previous range of $3.05 to $3.20.

For the third quarter, adjusted earnings per share are expected to range from $1.25 to $1.35, based on the normal but slightly delayed distribution of fruit and vegetable pack season. However, political volatility in various international regions could hurt earnings.

Other Stocks to Consider

Other stocks in the industry that are currently performing well and have a good visibility include Mobile Mini, Inc. (MINI - Free Report) , Packaging Corporation of America (PKG - Free Report) and Boise Inc. . All three carry a Zacks Rank #2 (Buy).

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