Morningstar | Silgan's Metal Can Weakness More Than Offsets Strength in Closures and Plastics
Although Silgan reported decent financial results in the fourth quarter, its core metal food can business continues to struggle. Metal container segment income fell short of our expectations for 2018, due to the continued challenge of managing capacity relative to falling demand. The quarter was highlighted by fairly strong revenue and operating income in the smaller closures and plastics segments. Results from these segments lined up closely with our prior expectations. However, we've slightly trimmed our 2019 outlook to account for lower-than-expected guidance for the metal can business. We've reduced our fair value estimate to $28 from $28.50, with our narrow moat rating unchanged.In Silgan's metal food can business, adjusted segment operating income fell 3.3% in the fourth quarter and 1.7% for the year, despite a 4% increase in segment sales. While higher metal costs have helped Silgan's top line, small customer losses have weighed on volumes and profitability. For 2019, management has guided toward another volume downtick for the segment, leading us to slightly reduce our forecasts. Over the long term, there will still be a place for metal food cans, given their long shelf-lives and cost competitiveness. However, we expect minimal volume growth.
The closures and plastic container segments performed more solidly, with each driving significant margin expansion in 2018. Although management might be able to squeeze out an extra 20 basis points in margin expansion across both segments over the next couple years, we're less optimistic about the long-term profitability of these businesses. Metal cans benefit from efficient scale, as they're relatively bulky and can't be shipped very far. However, closures and plastics are typically stacked tightly and face competition from a wide variety of suppliers. We assume closure and plastics margins will fade over time, bringing segment returns on invested capital more closely in line with the company's cost of capital.
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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