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Silgan Holdings: Set for Record Profits
Stock Analysis & Ideas

Silgan Holdings: Set for Record Profits

Silgan Holdings (SLGN) is a leading global manufacturer of metal and plastic containers, as well as packaging closures. One can find the company’s containers in everyday food consumables such as pet food, fruits, and vegetables, as well as drinks. Silgan’s closures are also applied to beverage, garden, and personal care products.

Manufacturing containers and closures for packaging may not sound like an intriguing business model. However, Silgan’s competitive advantage lies in its ability to service its customers with a wide variety of innovative dispensing systems and proprietary specialty solutions that meet each order’s unique quality and safety standards.

With the business model being rather sticky as Silgan’s customers require a constant supply of containers, and the company gradually growing its production capacity, its financials have grown consistently over the years.

Accordingly, the company has managed to grow its dividend annually for nearly two decades at a rather rapid pace. Following its latest results, Silgan is on track to deliver another year of record profits. Combined with the stock trading at a rather cheap multiple, I am bullish on Silgan Holdings.

On Track for Record Profits

Silgan’s Q1 results came in rather strong, with revenues advancing 16.1% year-over-year to $1.44 billion. Revenue growth was powered by higher net sales across the board.

Specifically, even though the Metal Containers segment recorded a decline of 14% in unit volumes year-over-year, its sales increased 17.4% to $650.7 million as a result of higher pricing.

The drop in unit volumes was mainly due to aggressive customer purchases in late 2021 in advance of considerable price increases following the unprecedented inflation in metals.

Still, this illustrates Silgan’s ability to pass on increasing costs to its customers, as well as its customers’ urgency to supply themselves with containers which demonstrates the stickiness of Silgan’s business model.

The Dispensing & Closures division performed pleasingly as well, with sales coming in at $597.9 million, also 17.4% higher year-over-year. This gain was largely the result of elevated unit volumes of around 8%, and the pass-through of increased raw material and general manufacturing costs.

Finally, Custom Containers registered a 10.6% revenue gain to $193.3 million, with price increases again exceeding lower unit volumes, which declined by approximately 8%.

In terms of its profitability, Silgan posted a record adjusted EPS of $0.78, suggesting a 4% increase over Q1 2021. While this increase seems rather humble, note that the company’s Q1 2021 adjusted EPS of $0.75 was also a record at the time.

Thus, seeing the company leveraging the power of its portfolio while mitigating the impact of inflation and supply chain disruptions to post improving results on top of last year’s outsized numbers is quite impressive.

For the rest of the year, Silgan’s management anticipates continued robust performance from recent acquisitions, and continued strength to pass through raw material and other inflationary costs to its customers.

Accordingly, the outlook for Fiscal 2022 was raised, with Silgan now expecting adjusted EPS to come in between $3.90 and $4.05, up from $3.80 to $4 previously. Thus, targeting another year of record profits.

Dividend & Valuation

Silgan has increased its dividend per share annually for the past 18 years. Its 10-year DPS CAGR stands at a pleasing 9.79%, while dividend growth has started re-accelerating recently.

Last February, the company’s latest increase boosted the dividend by 14.3% to a quarterly rate of $0.16. At the midpoint of management’s guidance and the current DPS run-rate, it implies a payout ratio of 16%. Thus, the company has plenty of room to keep growing the dividend comfortably.

At the midpoint of management’s guidance, again, the stock is currently trading at a forward P/E of 11.4. This is one of the lowest multiples the stock has traded at over the past several years.

Considering that Silgan is currently enjoying record demand for its products and keeps growing its earnings in a tough environment, I believe shares are cheaply priced. That is, even taking into account that the current rising-rates environment is to soften valuation multiples across the market.

I would consider the stock fairly valued at a forward P/E close to 13.

Wall Street’s Take

Turning to Wall Street, Silgan Holdings has a Moderate Buy consensus rating based on four Buys, three Holds, and zero Sells assigned in the past three months. At $51.29, the average Silgan Holdings price target implies 13.5% upside potential.

Takeaway

Silgan’s operating excellence over the years is crystal clear, with the company never posting a money-losing four-quarter period since its IPO in 1996.

The stock is currently hovering at an inexpensive valuation, while the company’s dividend growth prospects remain rock solid. However, investors need to be wary of the fact that the company’s business model is subject to extremely thin margins amid high competition in the industry.

Even in Fiscal 2021, a year of record profits, net income margins came in as low as 6.33%. Thus, if, for any reason, the company is not able to pass through rising costs to its customers, it could potentially record losses. That said, this has never been the case thus far.

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