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Silgan Downgraded to Strong Sell

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On Dec 10, 2013, Zacks Investment Research downgraded Silgan Holdings Inc. (SLGN - Free Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Silgan witnessed sharp downward price and estimate revisions after reporting disappointing third-quarter 2012 results on Oct 23. The company reported earnings of $1.23 per share in the third-quarter of 2013, which improved 5.1% year over year but were below the company’s guided range of $1.25 to $1.35 per share.

Despite volume growth in metal container business, headwinds related to weather and higher-than-anticipated interest expense affected the earnings. The results also fell short of the Zacks Consensus Estimate of $1.31. The company has delivered negative earnings surprise in the last three quarters.

For 2013, Silgan lowered its expectation for adjusted earnings per share to the band of $2.75 to $2.85 from $3.00 to $3.15. The Zacks Consensus Estimate for 2013 of $2.80 reflects a year-over-year increase of 3.74%.

Even though Silgan will benefit from its successful acquisitions, increasing productivity and cost reduction initiatives, soft demand in Europe remains a concern. Silgan’s exposure to Europe has increased following its Vogel & Noot acquisition and expansion of the Closures segment in the region. The ongoing economic instability in Europe has resulted in weakening demand and softer pricing. Additional pricing pressure is expected as European conditions may remain challenging over the next few quarters.

Furthermore, a high debt-to-capitalization ratio (74% as of third quarter end) and pricing pressure in North American food cans from competitor capacity additions, continued conversion of food cans to other forms of packaging, negative price/cost spread in its plastic business, and higher resin costs remain the near-term headwinds.

Over the last 60 days, all of the 10 estimates for Silgan were revised downward, pulling down the Zacks Consensus Estimate by 8.5% to $2.80 per share. For 2014 also, all of 10 estimates were revised lower over the same time frame, thereby lowering the Zacks Consensus Estimate by 7.6% to $3.15 per share.

Other Stocks to Consider

Not all stocks in the industrial products sector are performing as poorly as Silgan. Some better-ranked stocks in the same sector include Sealed Air Corporation (SEE - Free Report) , Packaging Corporation of America (PKG - Free Report) and UFP Technologies, Inc. (UFPT - Free Report) . All these stocks hold a Zacks Rank #2 (Buy).

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