2023-04-14 17:52:44 ET
Summary
- Silgan Holdings is a well-established player in the rigid packaging industry, providing packaging solutions for consumer goods such as food and beverages, healthcare, and personal care products.
- The company has been known to grow by acquisition, and it is planning to make more value-enhancing deals in the future.
- A comparative and discounted cash flow analysis suggests that the current market price of Silgan Holdings may be overvalued.
Intro
Silgan Holdings Inc. ( SLGN ) is a well-established company that specializes in the manufacturing and sale of rigid packaging for consumer goods. The company's packaging solutions are used for a wide range of products, including food, beverages, healthcare, and personal care items. Over the years, SLGN has achieved steady revenue growth and has expanded its market share through strategic acquisitions and partnerships.
SLGN operates in a highly competitive market, which poses challenges for the company's growth and profitability. In addition, SLGN has a considerable amount of debt with a debt-to-equity ratio of 1.99, which is a cause for concern especially if the company ever lost one of its major customers.
In this article, we seek to provide an in-depth analysis of SLGN's business model and financial performance, as well as its prospects for future growth. By estimating the company's intrinsic value using various valuation techniques, we hope to provide investors with valuable insights into whether Silgan Holdings Inc. is a sound investment opportunity in today's market.
Business Model
SLGN is a leading supplier of rigid packaging solutions for consumer goods. The company produces a variety of products such as metal and plastic containers, closures, and dispensing systems that are used by customers across the food & beverage, personal care, and healthcare industries.
As a packaging provider, SLGN works closely with its customers to understand their specific needs and then uses its expertise to design and produce customized solutions that meet those needs. The company has a global network of manufacturing facilities that allows it to efficiently produce and deliver products to customers around the world.
SLGN's primary business segments include metal containers, closures, and custom containers. The metal container segment produces products such as steel and aluminum cans for food and beverage packaging, while the closures segment produces caps, closures, and dispensing systems for various industries. The custom container segment produces products such as plastic bottles and jars for personal care and healthcare packaging.
To ensure the quality and consistency of its products, SLGN invests heavily in research and development, as well as advanced manufacturing technologies. The company also focuses on sustainability and reducing its environmental impact through initiatives such as lightweighting its packaging and increasing the use of recyclable materials.
SLGN organizes itself by geographic regions, with operations in North America, Europe, and Asia. The company has a strong customer base in each of these regions and has built a reputation for delivering high-quality products and exceptional customer service. Silgan Holdings Inc. is committed to expanding its global footprint and investing in new markets where it sees opportunities for growth and profitability.
Track Record
Over the past decade, Silgan Holdings has shown steady growth in revenue. In the most recent fiscal year, the company reported $6.4 billion in revenue, which is a 73% increase from ten years ago. It's also impressive that the company has been able to grow its revenue consistently over that period with just two years of revenue declines.
Data by Stock Analysis
Silgan Holdings has also demonstrated significant growth in its free cash flow. In the most recent fiscal year, the company announced $532 million in free cash flow, which is a remarkable 115% increase from a decade ago.
In addition to its impressive growth, SLGN has also shown remarkable profitability over the years. For the past decade, the company has maintained an average return on equity of 27%, with no single year below 20%.
Data by Stock Analysis
When looking at the financial health of the company, I noticed that SLGN's interest coverage ratio is 4.75, which is a little lower than my preferred threshold. Additionally, the company's current ratio is below 1.48 and its debt-to-equity ratio is 1.99, indicating a higher level of debt than I like to see. Considering these factors together, I believe it would be wise for the company to focus on improving its balance sheet. Companies with weak balance sheets are at a higher risk of bankruptcy, and I want to ensure that SLGN mitigates this risk.
Over Silgan Holdings has put together a nice track record of profitability and growth, and its investors have received nice returns as well. Over the past five years, the company's total return has outperformed the S&P 500, with a total return of 103%, outpacing the S&P 500's total return of 71%. As a result, investors are confident about SLGN's future performance and its ability to continue delivering value to its shareholders.
Outlook
Silgan Holdings Inc. is one of the top producers in the world of rigid packaging products for consumer goods and their goal is to strengthen its leading position. To achieve this, the company is focusing on a few important things beginning with quality. SLGN is focused on ensuring their products are top quality and come with excellent customer service with industry-leading technology support.
In addition, Silgan Holdings Inc. is prioritizing improving its profitability by increasing productivity and reducing costs. SLGN is already one of the lowest-cost producers in the industry, but the company is always looking for ways to keep its costs low so they can offer their products at the lowest possible price. Some cost-saving initiatives the company is working on include maintaining a flat organizational structure to reduce administrative expenses and investing in new technologies to improve manufacturing efficiency.
SLGN is also focusing on maintaining an optimal capital structure to support growth and maximize shareholder value. The company has been known to grow by acquisition and it is planning to make more value-enhancing deals in the future by using a reasonable amount of leverage, backed by its stable cash flows provided by long-term customer relationships.
There are still some risks that could affect the business in the future. In 2022, roughly 90% of SLGN's sales for metal containers and dispensing and specialty closures and custom containers, were based on multi-year supply agreements. Although SLGN, has a good track record or renegotiating and continuing these long-term deals before they expire, if the company were to lose a major customer, or if a major customer significantly reduced their purchasing levels or changed the terms of its supply agreement unfavorably, it could have a negative impact on SLGN's financial performance.
Losing a major customer would particularly be devastating to SLGN because it would impact its ability to pay down the level of debt the company currently has. SLGN's total debt stands at $3.4 billion which was accumulated by financing acquisitions and refinancing its existing debt. Having a lot of debt means the company has to spend a significant amount of their profits on repaying the debt, which leaves less money available for making new acquisitions, investing in the business, and covering general expenses which can stunt the business' growth in the future.
Valuation
Using a comparative and discounted cash flow ((DCF)) analysis, we can evaluate SLGN's intrinsic value. Our comparative analysis will involve reviewing SLGN's historical price-to-earnings (P/E) ratios over the past five years, along with the sector median P/E ratio. By applying these ratios to SLGN's next year's consensus EPS estimate , we can determine its fair value based on past market valuations.
Scenario | P/E | Next Year Earnings Estimate | Intrinsic Value Estimate | % Change |
Bear Case | 7.52 | $4.06 | $30.53 | -41.69% |
5Y Median P/E | 14.15 | $4.06 | $57.45 | 9.72% |
Bull Case | 19.24 | $4.06 | $78.11 | 49.19% |
Sector Median Valuation | 12.65 | $4.06 | $51.36 | -1.91% |
After running both bear and bull case scenarios, the bull case produced a steeper upside than the bear case's downside, with a potential loss of 41% compared to a gain of 49%. If valued at the sector median multiple, investors would experience a potential loss of 1.91%, while the base case scenario, based on the 5-year median P/E ratio, could lead to a potential gain of 9.72%. Overall, the comparative analysis suggests that SLGN is close to fair value but has slightly more upside than downside risk.
For our DCF analysis, we will use the average free cash flows of SLGN from the previous five years, which is $366 million. We will apply a growth rate of 4% per year for the next ten years, as analysts are predicting similar growth rates for SLGN over the next few years. After the 10th year, we will assume a growth rate of 2.5% per year to find the company's terminal value. The discount rate used will be 10%, based on the long-term return of the S&P 500 when dividends are reinvested.
With these inputs, the DCF analysis indicates an intrinsic value per share of $50.64, suggesting a potential loss of 3.22% at SLGN's current share price. Therefore, based on this analysis, SLGN is right at fair value, and investors may be able to find a better entry point if they are considering starting a position in SLGN.
Takeaway
Silgan Holdings Inc. is a well-established player in the rigid packaging industry, providing packaging solutions for consumer goods such as food & beverages, healthcare, and personal care products. The company has achieved steady revenue growth and has been successful in generating free cash flow, which is an important indicator of financial health.
SLGN has a strong focus on innovation and sustainability, which has helped it establish a positive reputation in the market. However, the company operates in a highly competitive industry, and losing one of its major customers could be devastating considering the company's high levels of debt, with a debt-to-equity ratio of 1.99. The company has shown resilience in navigating these risks, but they remain a significant concern for SLGN's growth prospects.
A comparative and discounted cash flow analysis suggests that the current market price of SLGN may be overvalued or not undervalued enough to make it an attractive investment opportunity. While the company has strengths in certain areas, investors should exercise caution when considering an investment in SLGN at its current valuation. I suggest holding Silgan Holdings Inc. stock until the price comes down materially or the company lowers its debt levels to where it can invest in future growth.
For further details see:
Silgan Holdings: Hold This Leading Packaging Supplier