Silgan (SLGN) To Grow On Acquisition Strength, Risks Remain

On Aug 24, 2016, we issued an updated research report on Silgan Holdings Inc. SLGN. The company will benefit from acquisitions, increased investments and continued focus on footprint optimization programs. However, lower demand from certain U.S. pack customers and a cool and wet start to the European growing season remain headwinds.

Notably, Silgan continues to bolster profitability through strategic acquisitions and by growing footprint. The company's acquisition of the metal container manufacturing assets of Van Can in 2014 expanded and diversified its customer base, geographic presence and product lines of its metal container business in the U.S. Further acquisitions will drive growth.

The year 2015 was the beginning of a transition period for Silgan. The company undertook several footprint optimization programs across all its businesses, targeted to improve efficiencies, reduce costs and strengthen its competitive position in each of the markets. The Closures business successfully completed the optimization program during the year and delivered record operating income.

Further, the metal and Plastic Container businesses that focused on the construction of three manufacturing facilities, will strive to reduce logistical costs and the rationalization of plants will create an even lower cost manufacturing network. The transition will continue in 2016 as Silgan judiciously starts and qualifies these facilities, rationalizes certain other plants and further enhances the franchises to boost profitability in 2017 and beyond.

However, Silgan trimmed its 2016 earnings per share guidance to $2.70–$2.90. The guidance cut reflects current indications of lower demand from certain U.S. pack customers, a cool and wet start to the European growing season, and a somewhat more measured pace of equipment relocations associated with the footprint optimization program in the plastic container business.

In the plastics business, the complexity and magnitude of the ongoing optimization program led to significantly higher costs in 2015, and is expected to do so in 2016 as well. Moreover, ongoing logistical costs in the metal food can business prior to the qualification of the new plant, along with the ongoing transition and start-up costs, will hurt margins over the next few quarters.

Moreover, Silgan’s results will be hurt by lower demand and high debt.

At present, Silgan carries a Zacks Rank #3 (Hold).

Stocks that Warrant a Look

Some better-ranked stocks in the sector are Berry Plastics Group, Inc. BERY, DXP Enterprises, Inc. DXPE and HollySys Automation Technologies, Ltd. HOLI. All three stocks sport a Zacks Rank #1 (Strong Buy).

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