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Dispensing Systems Buyout Aids Silgan Holdings Amid Inflation

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On Nov 15, we issued an updated research report on Silgan Holdings Inc. (SLGN - Free Report) . The company is poised to gain from the Dispensing Systems acquisition, rise in capital expenditures and lower tax rates. However, volume declines in its largest business, food cans, inflated freight costs and material costs might restrain margins in the near term.
 
Let’s illustrate the factors in detail.
 
Dispensing Systems Acquisition to Drive Growth
 
In April 2017, Silgan Holdings acquired the specialty closures and dispensing systems operations of WestRock Company (WRK - Free Report) , now operating under the name Silgan Dispensing Systems (“SDS”). Silgan Holdings’ Closures segment (which contributed 28% of the company’s revenues in the third-quarter 2018) will continue to benefit from the Dispensing Systems acquisition, including synergies, and continued benefits from manufacturing efficiencies and higher unit volumes.
 
Investment in Business to Drive Growth
 
For 2018, Silgan Holdings expects capital expenditures of $200 million, up from $175 million reported in the previous year. Year to date, Silgan Holdings reported capital expenditures of around $135 million, compared with $124 million in 2017. Notably, capital expenditures in 2018 will be utilized for new facilities in Fort Smith, AR and Allentown, PA. Further, the company’s strong cash-flow position, based on higher operating income in each business, net improvement in working capital and lower cash taxes will drive growth.
 
Lower Tax Rates to Boost Earnings
 
Silgan Holdings anticipates the effective tax rate for 2018 to be 24%, reflecting a substantial improvement from 33.8% in 2017, excluding certain effective tax-rate adjustments. The lower effective tax rate for 2018 reflects the impact of the U.S. Tax Cuts and Jobs Act of 2017. Silgan Holdings, which had been operating with comparative tax rate disadvantages compared with many of its peers, will benefit substantially. This recent tax reform is expected to reduce cash obligations for existing net deferred tax liabilities and enable greater flexibility to utilize global cash to invest in optimal locations.
 
Lower Volumes in Metal Containers Segment: A Concern
 
Silgan Holdings is witnessing continued significant volume declines in its largest business, food cans. Industry overcapacity, weakness in soup category is affecting volumes. Further, a significant part of the volume decline can be attributed to one customer undergoing portfolio management efforts and the associated food can inventory reductions. In fact, the customer has signaled its intentions to reduce inventories further next year. Moreover, closure of a fruit processing plant on the West Coast and the competitive loss of another customer led to lower volumes. 
 
Inflated Costs to Suppress Margins
 
The company expects inflated freight costs to impact the current-year results. Silgan Holdings’ margin performance will be also impacted in 2018 by material cost inflation mainly due to tariffs on steel and aluminum prices imposed by the U.S. government.
 
Share Price Performance
 
 
Over the past year, shares of Silgan Holdings have dropped 12.7%, against the industry’s growth of 7.3%.
 
Zacks Rank & Key Picks
 
Silgan Holdings currently carries a Zacks Rank #3 (Hold).
 
Better-ranked stocks in the same sector include Enersys (ENS - Free Report) and Flowserve Corporation (FLS - Free Report) . While Enersys sports a Zacks Rank #1 (Strong Buy), Flowserve carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Enersys has a long-term earnings growth rate of 10%. Shares of the company have appreciated 28% over the past year.
 
Flowserve has a long-term earnings growth rate of 17%. Its shares have rallied around 22% in the past year.
 
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