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Dispensing Systems Buyout Aids Silgan Holdings Amid Inflation

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On Oct 5, we issued an updated research report on Silgan Holdings Inc. SLGN. The company is poised to gain from the Dispensing Systems acquisition, rise in capital expenditures and lower tax rates. However, lower volumes, inflated freight costs and tariffs might thwart the company’s growth in the near future.

Let’s illustrate the factors in detail.

Dispensing Systems Acquisition to Drive Growth

Silgan Holdings’ Closures segment recorded improved results in second-quarter 2018 driven by strong performance of the Dispensing Systems business. Its closures business will also likely benefit in second-half 2018 from Dispensing Systems' operations, including synergies, continued benefits from manufacturing efficiencies and higher unit volumes.

Rising Capital Expenditures to Assist Results

For 2018, Silgan Holdings expects capital expenditures of $200 million, up from $175 million reported in the previous year. 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 expects the effective tax rate for 2018 to be 20-25%, reflecting a substantial improvement from 2017, excluding certain effective tax-rate adjustments. The lower effective tax rate for the ongoing year reflects the impact of the U.S. Tax Cuts and Jobs Act of 2017. The tax reform will likely reduce cash obligations for existing net deferred tax liabilities and enable greater flexibility to utilize global cash to invest in optimal locations.

Lower Volumes Remain a Headwind

Silgan Holdings’ Metal Containers segment experienced a less favorable overhead absorption and moderately lower volumes in the June-end quarter. Specifically, more than half of the volume decline in the quarter was the result of one customer undergoing portfolio-management efforts and the associated inventory reductions. The company expects this headwind to remain through the year and impact margins.

Inflated Freight Costs to Hurt Results

Shortage of drivers and trucks due to strike led to increased fuel rates and freight. The company expects inflated freight costs to impact the current-year results.

Tariffs to Impede Silgan Holdings’ Margins

Silgan Holdings’ margin performance will be 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, Silgan Holdings has underperformed the industry it belongs to. The stock has dipped 6.6%, while the industry witnessed growth of 0.1% during the same time frame.


Zacks Rank & Key Picks

Silgan Holdings currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same industry include Atkore International Group Inc. ATKR, Donaldson Company, Inc. DCI and Flowserve Corporation FLS. All three stocks sport a Zacks Rank #1 (Strong buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Atkore has a long-term earnings growth rate of 10%. The stock has gained around 25% in a year’s time.

Donaldson has a long-term earnings growth rate of 11.5%. The company’s shares have rallied around 25% over the past year.

Flowserve has a long-term earnings growth rate of 17.3%. Its shares have rallied 24% in the past year.

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