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Why Hold Strategy is Apt for Silgan (SLGN) Stock Right Now

Zacks Equity Research

Silgan Holdings Inc. SLGN is poised to gain from acquisitions, manufacturing efficiencies and higher unit volumes despite inflated freight and material costs.

Silgan currently carries a Zacks Rank #3 (Hold) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, combined with a Zacks Rank #1 (Strong Buy) 2 (Buy) or 3, offer the best investment opportunities for investors.

Below, we briefly analyze the company's potential growth drivers and possible headwinds.

Factors Favoring Silgan

Positive Earnings Surprise History: The company has outpaced the Zacks Consensus Estimate in three of the trailing four quarters. This resulted in an average positive earnings surprise of 3.27%.
 
Strong Growth Projections: The Zacks Consensus Estimate for earnings is currently pegged at $2.20 for current year, reflecting year-over-year growth of 5.56%. For 2020, the Zacks Consensus Estimate for earnings is pegged at $2.35, highlighting year-over-year growth of 7.09%. Also, the company has an estimated long-term earnings growth rate of 7.70%.

Underpriced: Looking at Silgan’s price-to-earnings ratio, shares are underpriced at the current level, which seems to be attractive for investors. The company has a trailing P/E ratio of 14, which is below the industry average of 21.4.

Return on Assets: Silgan currently has a Return on Assets (ROA) of 4.9%, while the industry recorded ROA of 4.6%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.

Return on Equity (ROE): Silgan’s trailing 12-month ROE of 26.5% reinforces its growth potential. The company’s ROE is higher than the ROE of 24.8% for the industry, highlighting its efficiency in utilizing shareholders’ funds.

Growth Drivers

The company continually evaluates cost-reduction opportunities across each of its businesses, including rationalizations of the existing facilities through plant closures and downsizings, which, in turn, will aid margins.

Silgan projects adjusted earnings per share at $2.10-$2.20 for 2019. The company had reported earnings per share of $2.08 in earlier fiscal.

Since its inception, Silgan Holdings acquired 35 businesses. Backed by acquisitions and organic growth, the company has increased share in the metal food-container market in the United States from 10% in 1987 to slightly more than half of the market in 2018.

The company has become a leading global manufacturer of closures for food, beverage, health care, garden, personal care, home and beauty products through acquisitions, with net sales of $1.46 billion in 2018, a sevenfold increase since 2003. Silgan Holdings has also improved its market position in the plastic-container business since 1987, with net sales increasing sevenfold to $614.1 million in 2018.

In the first half of fiscal 2019, capital spending was around $116 million compared with $91 million in the comparable period last year. For the current year, the company anticipates capital expenditures of $200 million, up from $191 million reported in fiscal 2018. The company also projects free cash flow guidance at $275 million for 2019. It remains focused on returning value to shareholders through dividend payment.

Headwinds to Counter

Tariff on steel and aluminum prices imposed by the U.S. government escalated material costs. The company expects inflated material and freight costs to keep impacting its results in current year as well. Moreover, it estimates unit volume decline in the metal-container business in 2019, due to customer pre-buy activities at the end of 2018.

Bottom Line

Investors might want to hold on to the stock, at present, as it has ample prospects for outperforming peers in the near future.

Silgan Holdings Inc. Price and Consensus

Silgan Holdings Inc. Price and Consensus

Silgan Holdings Inc. price-consensus-chart | Silgan Holdings Inc. Quote

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Albany International Corporation AIN AGCO Corporation AGCO and UFP Technologies, Inc. UFPT. While Albany International sports a Zacks Rank #1, AGCO Corp and UFP Technologies carries a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Albany International has an estimated earnings growth rate of 33.85% for 2019. The company’s shares have rallied 41%, year to date.

AGCO Corp has a projected earnings growth rate of 31.11% for the current year. The stock has gained 36.2% so far this year.

UFP Technologies has an expected earnings growth rate of 8.10% for the ongoing year. The stock has appreciated 37.4% over the past year.

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