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Here's Why Should You Hold on to Silgan (SLGN) at the Moment

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Silgan Holdings Inc. (SLGN - Free Report) is poised to gain from the Dispensing Systems acquisition, increased capital expenditure and lower tax rate despite raw material cost inflation.

The company has outpaced the Zacks Consensus Estimate in two of the trailing four quarters. This resulted in average positive earnings surprise of 5.23%. The company has an estimated long-term earnings growth rate of 7.70%.

Below, we briefly analyze the company's potential growth drivers and possible headwinds.

Factors Favoring Silgan

Upbeat Q4 Outlook: Silgan expects to deliver improved operating results across all businesses in 2019. The company expects adjusted earnings of $2.10-$2.20 per share for 2019, reflecting a 9.6% increase from the prior year at the mid-point. Silgan provided adjusted earnings per share guidance at 40 to 45 cents for the first quarter of 2019. Compared with earnings of 42 cents per share in the first quarter of 2018, the mid-point of the guidance reflects a year-over year improvement of 1%.

Positive Growth Projections: The Zacks Consensus Estimate for earnings is currently pegged at $2.17 for fiscal 2019, reflecting year-over-year growth of 4.33%. For fiscal 2020, the Zacks Consensus Estimate for earnings is pegged at $2.32, highlighting year-over-year growth of 7.04%.
 
Price Performance: The stock has gained around 13.9% over the past three months, outperforming the industry’s gain of 9.7%.



Growth Drivers

Dispensing Systems Acquisition Benefits

Silgan acquired the specialty closures and dispensing systems operations of WestRock Company (WRK - Free Report) in 2017, now operating under the name Silgan Dispensing Systems (“SDS’’). The company’s Closures business (which contributed 32% to revenues in fourth-quarter 2018) will continue to benefit from the acquisition of Dispensing Systems, including synergies, and continued benefits from manufacturing efficiencies and higher unit volume.

Capital Expenditure to Drive Growth

In 2018, Silgan reported capital expenditure of around $191 million compared with $175 million in 2017. Capital expenditure is projected at $200 million for 2019. 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 Aid Results

Silgan expects the effective tax rate to be 24% in 2019, in line with 2018, excluding certain effective tax-rate adjustments. The effective tax rate reflects the impact of the U.S. Tax Cuts and Jobs Act of 2017. The 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.

Favorable Rank, Score Combination: Silgan carries a Zacks Rank #3 (Hold) and a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 make solid investment choices.

Further, the company has a return on equity — a profitability measure — of 26.8%, better than the industry average of 23.2%. This reflects the company’s efficiency in utilizing shareholders’ funds.

Headwinds to Counter

Tariff on steel and aluminum prices imposed by the U.S. government led to a rise in material costs. The company expects inflated material and freight costs to continue to impact results in 2019. Moreover, the company expects unit volume decline in the metal container business in 2019 due to customer pre-buy activity at the end of 2018. 

Silgan Holdings Inc. Price and Consensus

 

Stocks to Consider

A few better-ranked stocks in the Industrial Products sector are Axon Enterprise, Inc (AAXN - Free Report) ,  and Alarm.com Holdings, Inc. (ALRM - Free Report) , each sporting Zacks Rank #1.You can see the complete list of today’s Zacks #1 Rank stocks here.

Axon has an expected earnings growth rate of 14.5% for 2019. The company’s shares have gained 22.6% in the past three months.

Alarm.com has an expected earnings growth rate of 7.8% for 2019.  The stock has climbed 45.6% in the past three months.

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