Silgan Posts Dismal Quarter; Lowers Full Year Guidance

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After reviewing Silgan’s disappointing third-quarter results, we are maintaining our $42 per share fair value estimate as well as our narrow economic moat rating. We are, however, reducing our full-year EPS estimate to $2.78 after management lowered guidance to $2.75-$2.85 from $3.00-$3.15.

Our longer-term thesis on Silgan is that, while the company currently possesses a meaningful low-cost manufacturing advantage in its metal food can segment, it faces deteriorating bargaining power with customers as food companies slowly shift away from the can and toward other options such as flexible plastic and paper-based packages. We continue to believe this is the case and expect that Silgan’s current long-term contract negotiations with Campbell Soup (14% of 2012 metal can sales) will bear less favorable terms for Silgan going into 2014 and beyond.

The third quarter is Silgan’s most important of the year as it captures most of the fruit and vegetable packaging season in North America and Europe, which directly affects the company’s metal food can business. In July, management said it expected a strong pack season, but that did not turn out to be the case. Relative to other U.S. metal food can producers, Silgan has more exposure to West Coast fruits and vegetables, and management cited a particularly weak pack in that region on account of poor weather as the major headwind this quarter. On a positive note, Silgan saw volume growth from the pet food end-market and a slight recovery in soup demand.

Silgan’s closures business was also weak this quarter as cool temperatures in the U.S. reduced demand for single-serve beverages. On Tuesday, Silgan closed its $266 million acquisition of plastic closure producer Portola Packaging. This will boost the segment’s top line in 2014, but we believe modest synergy benefits won’t be fully realized in 2015.

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