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Morningstar | Silgan's Metal Business Is Poised to Stagnate, but Plastics and Dispensers Should Stimulate Growth

Silgan is the largest producer of steel and aluminum food cans in North America. As the company moves past the ongoing restructuring of its metal container and plastics facilities, revenue growth and margins should rebound.Metal food cans and closures are Silgan's primary business at 85% of sales. Silgan, like most can makers, benefits from the efficient scale phenomenon in which the introduction of new production within a region can destroy the profitability of both the incumbent and entrant, because of shipping distance limitations. As a result, entrants are deterred, affording Silgan a degree of pricing power. Margins have recently been under pressure as Silgan adjusted its footprint with a new facility in Iowa to align with the needs of its biggest customers. Margins are on their way to recovery as restructuring costs fall and the new facility runs at a normal operating rate.To deal with stagnant North American food can volume, Silgan has embarked on a program, Can Vision 2020, to improve the public image of food cans and reduce manufacturing costs. While we think Silgan will succeed in squeezing out some margin gains through cost reductions, changing the public image of cans is an uphill battle. Although we think share gains by fresh produce will continue, population growth will keep total food can volume fairly flat.Silgan’s smaller plastics business is less attractive than its metal container and closures segments. Limited capital requirements and a smaller equipment footprint often prevent economic profits, as customers can more easily balk at higher prices and bring processing in-house. Even so, we believe that recent weakness in margins and revenue growth is primarily attributable to ongoing efforts to align its footprint with existing customers, as opposed to a sign of things to come. As Silgan's new facilities come on line in the coming years, segment costs are likely to fall as the company spends less to accommodate customer needs through the transition.