We maintain our Neutral recommendation on Silgan Holdings Inc. (SLGN). The stock retains a short-term Zacks #3 (Hold rating).
Silgan Holdings' second quarter revenues dipped 0.1% to $822 million but EPS increased 4% to 55 cents. However, the company lagged the Zacks Consensus Estimate on both lines.
Since its inception, Silgan Holdings' growth has primarily been driven by acquisitions. Apart from the metal food container business, Silgan strengthened its position in the plastic container and closures businesses through strategic acquisitions. With the acquisition of the metal container operations of Vogel & Noot Holding last year, the company emerged as the leading manufacturer of metal containers in Europe. The company's recent acquisition of Rexam's high-barrier food business will not only add to its growth platform through an adjacent product/technology but also augment its scope for international expansion. The acquisition is expected to be accretive to 2013 earnings.
Silgan Holdings continues to enhance profitability through productivity and cost reduction opportunities. Consistent with its continuing efforts of streamlining its plant operations, reducing operating costs and better match supply with geographic demand, Silgan has closed three metal container manufacturing facilities, one closures manufacturing facility and two plastic container manufacturing facilities since 2007. Furthermore in 2012, Silgan announced plans to close one more plastic container manufacturing facility, and laid off more employees in its closures business.
The Plastics Container segment posted a strong quarter helped by strong volumes, lower resin prices, favorable mix and cost reductions. We expect margins to improve further in 2013 with the addition of Rexam's high-barrier food business.
On the flipside, Silgan's metal container segment's volumes in the second quarter were negatively affected by a slow start to the vegetable pack, presumably owing to the heat wave and drought affecting the Midwest. In the quarter, peas and green beans were harvested later than anticipated because of weather issues, and resulted in some order shifting to the second half of 2012. Although other crops are following a somewhat normal pattern, though delayed, the main concern remains regarding sweet corn. It represents approximately 5% of total food can volumes and is cultivated in the upper Midwest (Minnesota and Wisconsin) and is largely irrigated, so the primary risk to the crop is continued extreme heat. If the sweet corn crop harvest is not as per expectations, it might affect Silgan's earnings.
Silgan's exposure to Europe has increased following its Vogel & Noot acquisition and expansion of the Closures segment in the region, accounting for almost 50% of the segment's revenues. In Europe, weakening demand and softer pricing has emerged as a result of the ongoing economic instability in the region. With the European conditions expected to remain challenging over the next few quarters, we expect additional pricing pressure.
Furthermore, Silgan Holdings' high debt-to-capitalization ratio is a concern. As of June 30, 2012, its debt-to-capitalization ratio was at 73%. Its strategy to leverage for acquisitions will further aggravate the company's debt position.
Silgan Holdings Inc. is one of the leading North American manufacturers of metal and plastic consumer goods packaging products. Its products are used in a wide variety of end-markets. It is the largest metal-container supplier for food products in North America. The company has 82 manufacturing plants throughout North and South America, Europe, and Asia. Silgan competes with companies like Ball Corporation (BLL) and Crown Holding Inc. (CCK).