EUR 850.00 For Business Accounts Only

Morningstar | Another Weak Quarter of Food Can Volumes Weighs on Metal Container Operating Profit

While Silgan's third quarter was decent overall, food can volumes continued to fall. In the second quarter, volume declined 9%, led by a customer plant closure and declining soup volumes. In the third quarter, volumes remained off by 6% year on year, leading to fairly weak operating profit in Silgan's metal containers business. This appears likely to remain a headwind at least through early next year. In light of the continued weakness, we've slightly decreased our operating profit estimates for the segment in both 2018 and 2019 to reflect a near-term drag in soup volume and total capacity utilization. Over the next five years, we still think that Silgan will be able to expand segment margins by roughly 0.5% to 9.5%, as it adjusts capacity and total food can volumes stabilize--centered on vegetable and fruit preservation and consumption. Our adjustments in metal containers led us to decrease our fair value estimate to $28.50 per share from $29. We maintain our narrow moat rating.

We view Silgan as undervalued and believe that the Oct. 24 market decline of nearly 8% is somewhat extreme. As has been true in years past, investors can occasionally become overly concerned that the demise of food cans is near. While we don't deny that pockets of the market may prove weak in the coming years, we think the company's returns will be preserved by careful capacity management and far more stable demand in the form of vegetable and pet food packaging.

The remainder of Silgan's business performed in line with our expectations. Closures segment adjusted operating margins rose to 13.1%, the best we've seen in the last decade, due to a combination of some realized synergies through the integration of its dispensing systems acquisition, and improving product mix. Over the course of a full cycle, we think margins will likely be somewhat lower than they are today--closer to 12%--as elevated margins would likely incite in-sourcing or competition. In plastics, volumes rose 3% versus the prior year, though adjusted operating margins compressed to below 6%. We expect a minor rebound in margins as Silgan recaptures higher resin costs through contractual pass-throughs over the coming quarters. The segment should also benefit from improving operating rates over time.