On Dec 7, 2015, Zacks Investment Research downgraded Silgan Holdings Inc. SLGN, the packaging company, to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Silgan’s earnings declined 5% year over year to $1.26 per share in third-quarter 2015 due to logistical challenges and incremental costs related to its footprint optimization programs. Total revenue also went down 2% year over year. The company witnessed declines in closure and plastic containers businesses, which was somewhat offset by an increase in the metal container business.
During the quarter, the company incurred direct incremental costs associated with footprint optimization in the plastics business and the efforts to minimize the impact of these activities on customers. These incremental costs will persist and affect margins for the next several quarters.
Based on the company’s performance so far in the year and expectations of incremental spending in the plastic container business as well as the impact of a truncated fruit and vegetable pack in the U.S., Silgan lowered its adjusted net income per share estimate for 2015 to the range of $2.88 to $2.98. The company expects earnings in the range of $3.10—$3.30. Compared with $3.17 earned in fiscal 2014, this reflects a decline in the range of 6% to 9%.
For the fourth quarter of 2015, Silgan projects adjusted income per share in the range of 38 cents to 48 cents. This includes the impact of continued incremental spending associated with the footprint optimization programs. Compared to the record adjusted net income per share of 58 cents in the fourth quarter of 2014, the guidance assumes a decline in the range of 17% to 34%.
The year-over-year decline is largely due to the continuation of incremental costs similar to those in the third quarter associated with footprint optimization programs in both plastic and metal container businesses, lower pound volumes in plastics and the impact of an abrupt end to the fruit and vegetable pack.
Moreover, unfavorable foreign currency translation, weak demand in plastics and high debt remain concerns for Silgan.
Additionally, the downtrend in Silgan’s estimates over the past 60 days reflects negative sentiment. The Zacks Consensus Estimate decreased 8.2% to $2.92 per share for 2015 and 12.7% to $3.02 per share for 2016.
Stocks to Consider
Some better-ranked stocks in the same sector include Albany International Corp. AIN, Brady Corp. BRC and Codexis, Inc. CDXS. All these stocks carry a Zacks Rank #1 (Strong Buy).
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