SLGN (SLGN) Bets on Pandemic Driven Demand Amid High Debt
On Apr 12, we issued an updated research report on Silgan Holdings Inc. SLGN. The acquisition of the dispensing business of the Albéa Group is a strategic fit for the closures segment and is likely lead to cost synergies of $20 million on an annual run rate basis. The company is poised well to capitalize on the surge in demand for vital products like food, beverage and consumer health and personal care products amid the coronavirus crisis. However, demand for certain products generally not intended for stay-at-home use, such as gallon, food cans for restaurants, sports drinks and some beauty products has been weak recently, which is likely to weigh on the company’s results.
Pandemic Induced Demand to Fuel Results
Silgan has been witnessing strong volumes in all of its segments backed by demand for vital products like food, beverage and consumer health and personal care products triggered by the COVID-19 pandemic. Backed by the ongoing momentum in demand for shelf-stable metal food packaging and health and hygiene products, Silgan expects adjusted earnings per share in the range of $3.30 to $3.45 in 2021. The mid-point of the guided range indicates an improvement of 10.3% over the record earnings per share of $3.06 in 2020. The company’s ongoing focus on cost reduction will continue to aid margins.
Buyout of Albea’s Dispensing Business: A Strategic Fit
In June 2020, Silgan closed the previously-announced acquisition of Albea’s dispensing business. It is a strategic fit for the closures business. This buyout is likely to strengthen its position in the dispensing markets. The company expects to realize operational cost synergies of $20 million, on an annual run rate basis. These synergies would be achieved primarily through reductions in general and administrative expenses, procurement savings and manufacturing efficiencies. This buyout is anticipated to become more accretive as synergies are phased in over the next 18 months, and customer buying patterns for the beauty and personal care markets return to more normal levels.
Segments Poised for Growth
The metal container segment’s income in 2021 is expected to modestly improve year over year on the current solid demand, manufacturing improvement efforts and higher pension income. Segment income in the closures business is anticipated to increase significantly this year compared to the prior year primarily due to the inclusion of the dispensing operations of Albéa. New business gains, improved manufacturing efficiencies and higher pension income will also drive the segment’s income. The plastic container segment’s income is expected to benefit from anticipated higher volumes backed by new business awards and continued manufacturing efficiencies.
High Debt Levels Remain a Concern
Following the completion of the acquisition of Albea’s dispensing business, Silgan’s total debt to total capital ratio has gone up to 0.72 as of the 2020 end compared to 0.69 at the end of 2019. High debt levels and the consequent higher interest expense remain woes. However, the company is taking proactive measures to strengthen its balance sheet amid the ongoing uncertainty. For 2021, Silgan’s free cash flow is estimated at $380 million. The company projects capital expenditures in 2021 to be approximately $230 million.
Weak Demand for Certain Products is a Woe
Amid the pandemic, demand for products not intended for stay-at-home use, such as gallon, food cans for restaurants and sports drinks have been impacted and this remains a headwind for Silgan. Beauty and personal care products account for around 25-30% of the company’s sales. Weakness in certain beauty products due to shift in consumers’ buying patterns as a result of the coronavirus crisis will weigh on Silgan’s results.. Further, the exposure to the fragrance market of the dispensing business of Albéa Group remains a concern. The fragrance market is heavily retail-based and travel-based. Volumes of this business are likely to be strained in the first half of fiscal 2021 and anticipated to recover thereafter.
Price Performance
The stock has gained 31.3% in the past year, compared with the industry’s rally of 41.0%.
Zacks Rank & Stocks to Consider
Silgan currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Industrial Products sector are Deere & Company DE, AGCO Corporation AGCO and Crown Holdings, Inc. CCK. All of these stocks carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Deere has a projected earnings growth rate of 82.5% for fiscal 2021. Over the past year, the company’s shares have soared 174%.
AGCO has an estimated earnings growth rate of 29.9% for the ongoing year. The company’s shares have surged 198% in the past year.
Crown Holdings has an expected earnings growth rate of 16.2% for 2021. The stock has appreciated 69% in a year’s time.
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