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Silgan Rides on Dispensing Systems Buyout Amid Inflation

Zacks Equity Research

On Feb 8, we issued an updated research report on Silgan Holdings Inc. SLGN. The company is poised to gain from the Dispensing Systems acquisition, increased capital expenditure and lower tax rate. However, volume decline in metal container business, and inflated freight and material costs might restrain margins in the near term.

Let’s delve deeper into these factors.

Dispensing Systems Acquisition Benefits

Silgan acquired the specialty closures and dispensing systems operations of WestRock Company WRK 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. Silgan expects capital expenditure to be $200 million in 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. This 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.

Upbeat Guidance

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%.

Lower Volume in Metal Container Segment Ails
Silgan is witnessing unit volume decline in the metal container business. Unit volume in the metal container business is expected to decline in 2019 due to the customer pre-buy activity at the end of 2018.
Inflated Costs to Lower Margins
Tariff on steel and aluminum prices imposed by the U.S. government led to rise in material costs. The company expects inflated material and freight costs to continue to impact results in 2019.

Share Price Performance

Over the past year, shares of Silgan have declined 0.6% against the industry’s growth of 22.8%.


Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the Industrial Products sector are Axon Enterprise, Inc AAXN and EnerSys ENS. While Axon currently flaunts a Zacks Rank #1 (Strong Buy), EnerSys carries a Zacks Rank #2 (Buy). 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 rallied 100.8% in the past year.

EnerSys has an expected earnings growth rate of 9.5% for 2019. Its shares have gained 6% in the past year.

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