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Silgan to Gain from Footprint Optimization, Headwinds Remain

On Apr 11, 2015, we issued an updated research report on Silgan Holdings Inc. SLGN. While acquisitions, expansion and a footprint optimization program are the growth drivers, concerns like high debt and foreign exchange volatility linger for this manufacturer of consumer goods packaging products.

Notably, the company continues to bolster profitability through strategic acquisitions and expansion of its footprint. Silgan’s acquisition of the metal container manufacturing assets of Van Can expanded and diversified its customer base, geographic presence and product lines of its metal container business in the United States. In addition, the company will continue to benefit from the Portola Packaging acquisition, which will enhance its Closure business and expand plastic closures offerings in Europe. Geographic expansion will also facilitate long-term growth.

Last year was the beginning of a transition period for Silgan. The company undertook several footprint optimization programs across all its businesses, targeted to improve efficiencies, reduce costs, and strengthen its competitive position in each of the markets. The Closures business successfully completed the optimization program during the year and delivered record operating income. The metal and Plastic Container businesses are focused on the construction of three manufacturing facilities, which will reduce logistical costs, and the rationalization of plants will lead to an even lower cost manufacturing network. The construction of these facilities is expected to be completed in the first half of 2016.

However, in the plastics business, the complexity and magnitude of the ongoing optimization program led to significantly higher costs in 2015 and is expected to do so in 2016 as well. Moreover, ongoing logistical costs in the metal food can business prior to the qualification of the new plant, along with the ongoing transition and start-up costs will hurt margins for the next few quarters.

For 2016, the company guides earnings per share in the range of $2.80 to $3.00. For the first quarter of 2016, Silgan expects sales to be down year over year due to the pass through of lower raw material and other costs. Income from operations is also expected to decrease due to significant incremental costs associated with footprint optimization programs and manufacturing inefficiencies, logistical challenges in the metal container business and the incurrence of start-up costs related to the three new manufacturing facilities. These factors affected results in the second half of 2015 as well. Silgan thus projects earnings per share in the range of 35 cents to 45 cents for the first quarter.

As Silgan’s international operations generated approximately 23% of its consolidated net sales in 2015, unfavorable foreign currency translation is likely to hurt results. The company had a high debt-to-capitalization ratio of 76% as of Sep 30, 2015, which is also a matter of concern. The company expects interest expense to increase slightly in 2016 due to higher weighted average interest rates, partially offset by lower average outstanding borrowings. This will hurt margins too.

Currently, Silgan has a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks include Crown Holdings Inc. CCK, Ball Corporation BLL and Sonoco Products Co. SON, each of which carry a Zacks Rank #2 (Buy).

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
SILGAN HOLDINGS (SLGN): Free Stock Analysis Report
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