Wait For Silgan To Get A Little Cheaper

By Stephen D. Simpson, CFA | February 29, 2012 AAA

The trouble with consistent performance is that you can't really justify paying a little extra for a stock with the idea that outperformance will redeem that premium over time. Silgan (Nasdaq:SLGN) is definitely one of the best-run packaging companies out there, but it's a stock that pretty much has to be bought right to work out. Consequently, while Silgan is a good name to follow right now, investors new to the name should hold out for a better price before taking the leap.

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Business More or Less OK
Although the fourth quarter highlighted some issues in unit volume growth and margins in the plastics business, business at Silgan is more or less going as expected.

Revenue rose 17% in the last quarter, with a significant boost coming from the Vogel & Noot acquisition. Although underlying volumes were fairly weak (up slightly in the U.S. in metal cans, down by single-digits in closures and plastics), pricing was solid and overall segment operating profit did rise 22% from the year-ago level. (For related reading on acquisitions, see Key Players In Mergers And Acquisitions.)

Pulling Growth From New Markets
Silgan already controls more than half of the U.S. market for food cans, and now the company is taking its proven model on the road in a bigger way. Vogel & Noot grows the company's exposure to Central/Eastern Europe, and is likely only the beginning of more concerted overseas buying.

Why shouldn't Silgan expand overseas? Many of the company's largest customers, including Campbell Soup (NYSE:CPB), Nestle (OTCBB:NSRGY), Unilever (NYSE:UL), and Procter & Gamble (NYSE:PG), have major international exposure and emerging market growth plans, and it only makes sense for Silgan to look to continue those relationships in faster-growing markets. Although the company is going to bump against Crown Holdings (NYSE:CCK) more often (it has about one-third share of the European can market), competition has never been a major problem for Silgan before.

Missing a Couple Potential Growth Opportunities
Although Silgan has used its years of solid free cash flow to conduct several acquisitions, there are still a few gaps in the company's model. Silgan is lacking the growth boost that Ball (NYSE:BLL) and Owens Illinois (NYSE:OI) can get from their exposure to emerging market beverage growth. Silgan also arguably needs to bulk up its plastic food container business.

The Bottom Line
While there are some risks to this name that go beyond basic product volume growth (including rising commodity costs and potential fallout from BPA), Silgan is a fairly predictable, well-run business. Although management is not shy about levering the balance sheet or buying growth, guidance tends to be relatively conservative and credible. (For related reading, see Commodity Prices And Currency Movements.)

That said, the growth profile here doesn't fully support buying the stock today. Silgan should see better growth than the average packaging company and steady improvement in free cash flow conversion, but the stock is arguably no more than 10% undervalued today - enough to hold, perhaps, but not much margin of error for new money.

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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