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Silgan (SLGN) Rides on Solid Demand & Buyouts Amid Cost Woes

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On May 17, we issued an updated research report on Silgan Holdings Inc. (SLGN - Free Report) . The company is well poised to gain from surge in demand for vital products like food, beverage and consumer health and personal care products amid the coronavirus crisis. However, higher input costs and demand for certain products generally not intended for stay-at-home use are likely to weigh on the company. The acquisition of the dispensing business of the Albéa Group also bode well.

Silgan reported first-quarter 2021 adjusted earnings of 75 cents per share, beating the Zacks Consensus Estimate of 71 cents. The bottom line also improved 31.5% year over year. Total revenues of $1,238 million improved 20.2% year over year on higher sales across its business segments. Further, the top line surpassed the Zacks Consensus Estimate of $1,220 million.

Strong Demand to Drive Results

Silgan has been witnessing strong volumes in all of its segments on demand for vital products like food, beverage and consumer health and personal care products triggered by the COVID-19 pandemic. Backed by the momentum in demand for shelf-stable metal food packaging and health and hygiene products, Silgan expects adjusted earnings per share in the range of $3.30 to $3.45 in 2021. The mid-point of the guided range indicates an improvement of 10.3% over the record earnings per share of $3.06 in 2020. The company’s focus on cost reduction will continue to aid margins.

Albea’s Dispensing Business Acquisition Bode Well

In June 2020, Silgan closed the acquisition of Albea’s dispensing business. It is a strategic fit for the Dispensing and Specialty 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. These synergies would be achieved primarily through reductions in general and administrative expenses, procurement savings and manufacturing efficiencies. The buyout 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.

Segments Poised for Growth

The metal container segment’s income in 2021 is likely to modestly improve year over year on the current solid demand and Silgan’s manufacturing-improvement efforts. The Dispensing and Specialty Closures segment is gaining from strength in the personal care, hygiene and health care markets, and an early recovery in the fragrance market. Segment income is expected to increase significantly in 2021 compared with the prior year primarily owing to the inclusion of the dispensing operations of Albéa. New business gains and improved manufacturing efficiencies will also drive the segment’s income. The Custom Containers segment continues to benefit from favorable product mix, anticipated higher volumes backed by new business awards and manufacturing efficiencies.

High Debt Levels a Concern

Following the completion of the acquisition of Albea’s dispensing business, Silgan has been witnessing increased debt levels for the past few quarters. High debt levels and the consequent higher interest expense remain concerns. The company is, however, taking proactive measures to strengthen its balance sheet amid the ongoing uncertainty. For 2021, Silgan’s free cash flow is estimated at $300 million.

Bleak Demand for Certain Products & Surging Input Costs

Certain products generally not intended for stay-at-home use, such as gallon, food cans for restaurants, sports drinks and some beauty products, are likely to witness volume declines this year. Further, the exposure to the fragrance market of the dispensing business of Albéa Group is a concern. Though volumes in the fragrance market have started to recover early, resurgence of COVID-19 cases might impact this recovery, given this market is heavily retail-based and travel-based. Moreover, significant impact from contractual lags in passing through the unprecedented inflation in resin and other raw materials might impact Silgan’s bottom line in the second quarter.

Price Performance

The stock has gained 35.4% in the past year compared with the industry’s rally of 49.2%.


 

Zacks Rank & Stocks to Consider

Silgan currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the Industrial Products sector include AGCO Corporation (AGCO - Free Report) , Avery Dennison Corporation (AVY - Free Report) and Caterpillar Inc. (CAT - Free Report) . All of these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AGCO Corporation has a projected earnings growth rate of 54.6% for the current year. Shares of the company have soared 217% over the past year.

Avery Dennison has an estimated earnings growth rate of 20.8% for 2021. The company’s shares have rallied 112% in a year’s time.

Caterpillar has an expected earnings growth rate of 45.6% for the ongoing year. Over the past year, the stock has appreciated 131%.

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