Morningstar | Silgan's Adjusted Operating Income Holds Up Despite Soft Volumes; Maintaining $28 FVE
Silgan's first quarter was decent, with the company calling out some volume weakness due to fourth-quarter pre-buying ahead of higher steel prices, offset by operational efficiencies and solid plastic container performance. Consolidated sales rose 1.5% versus the prior year to $1.03 billion in the quarter, largely due to higher steel prices passing through. Adjusted operating income was essentially flat. Falling volumes were offset by more cost-efficient operations as Silgan aligns its footprint with demand. With no major surprises during the start to 2019, we're maintaining our $28 per share fair value estimate and narrow-moat rating.In the metal containers segment, volumes fell a fairly severe 4%, and results were also impacted by unfavorable currency effects. However, containers and closures both suffered similar impacts largely due to some pre-purchasing that occurred in the fourth quarter before contracts repriced with higher steel prices in the first quarter. Adjusted segment operating income held up surprisingly well, rising slightly to $39 million for the quarter as more efficient operations offset lower throughput. Going forward, we remain wary of volumes, as Silgan can't afford to indefinitely lose volumes without seeing margins materially weaken.
The plastic business remained a positive offset. While the business remains far smaller than the metal container business, it acts as a partial hedge against switching that may occur between package substrates. Total sales volumes were up 5% versus the prior year. This helped drive adjusted segment income of $12 million, up roughly 9%. Following an extensive restructuring effort in 2015 and 2016, segment profitability has continued to improve. While we still think this segment is less moat-worthy than its metal containers business, we think management has made operational strides to improve profits in recent years.
Silgan Holdings is a holding company. Through its subsidiaries, the company manufactures rigid packaging for consumer goods products. The company operates three businesses; its metal container business, which used primarily by processors and packagers for food products, such as vegetables, soup, proteins, tomato based products, adult nutritional drinks and fruit ; its closures business, which manufactures metal and plastic closures and dispensing systems for food and beverage and health care products; and its plastic container business, which manufactures custom designed and stock plastic containers for personal care and health care products, including containers for mouthwash, shampoos, and conditioners.
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