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Diversification needs to be the premier term utilized when creating a portfolio. There is always strong temptation to find recognizable companies in familiar industries to seek profits. However, many potential portfolio-boosters are not in these ubiquitous corporations, but in more hidden industries like containers and packaging. Although this industry only contains 14 companies over a market capitalization of one billion dollars, this industry also supports companies with huge growth potential and undersold valuations. One particular company, Silgan Holdings (SLGN), not only has a strong business model, but utilizes such a plan to provide shareholders with the financial strength and potential investors look for when diversifying portfolios.
Before looking too deep into Silgan’s financial strength, it is important to examine the business model in relation to generation of revenue. According to Reuters, Silgan “is a manufacturer of metal and plastic consumer goods packaging products.” More specifically Silgan separates its business into three distinct sections: Metal Food Containers (61% of revenue), Plastic Containers (22% of revenue), and Closures (17% of revenue). While it was mentioned in the introduction that Silgan did not create products recognizable by brand to the average consumer, in an inconspicuous manner, the company provides products used quite frequently. For example, the Metal Food Container region is “engaged in the manufacture and sale of steel and aluminum containers.” These products are shaped to store consumer products such as soup, fruit, meat, coffee, and pet food among others. The last step is to then get these products sent to companies including General Mills, Campbell, and Del Monte. The Plastic Containers business plan follows a similar structure, offering “custom designed and stock HDPE containers for personal care and healthcare products, including containers for shampoos, conditioners, hand creams, lotions, cosmetics and toiletries.” After these products are engendered, procurement comes from similar consumer manufacturers including Unilever, Procter & Gamble and Kraft. The last section of business, Closures, is instructed to “manufacture metal, composite and plastic vacuum closures for food and beverage products.” Silgan’s consumers for this business include many of the aforementioned companies as well as other non-cyclical businesses such as Heinz, PepsiCo, and Coca-Cola. Therefore, while many investors may desire to invest in the more recognizable companies mentioned in this paragraph, without Silgan’s services, there is no formidable business for these other corporations.
However, in order for these services to be adequately distributed, there needs to be some demand evident. Fortunately for Silgan, over the past year, consumer products have, as a group, appreciated in share price by over three percent. While some investors may question the reasoning for appreciating such a low movement to the upside, it is important to know that the goods these companies provide are both inelastic and non-cyclical. Companies like Coca-Cola and General Mills will continue to sell goods all the time, regardless of price, at similar qualities. Moreover, during times of economic uncertainly, or slow economic growth (such as what is currently occurring) companies in the non-cyclical industry will attract more investors in a “flight to quality” movement, keeping share prices high for this industry. By process of deduction, if demand for Pepsi and Campbell’s soup remains strong, Silgan will continue to illustrate strong earnings, a low P/E ratio, and further share price appreciation. This design is convincingly evident, as Silgan has grown over 40% in share price the past year, escalated 22% in 2006, and has not had a down calendar year since 2000. This evidence supplied signifies a strong business planone that shall continue to make Silgan a strong company to commit capital too.
Nevertheless, while this business plan looks excellent, there are 25 other publicly-traded companies in this industry which may offer similar or better services. What separates Silgan? The answer is the strong fundamentals the company continuously reveals. Over the past twelve months Silgan has reported revenue at 2.67 billion dollars. This number competes quite nicely with industry-market cap competitors: Greif, AptarGroup, and Packaging Corporation of America. However the differences come in regarding margins. Gross margins for Silgan were reported at 14.65% and operating margins at 9.01% as a trailing figure, according to Reuters. Comparing these two numbers to five year averages of respective 12.80% and 7.79%, there is a fairly significant gain. While these numbers are slight below the industry trailing average of 22.54% and 7.50%, the difference is that the industry as a whole saw gross margins decrease from its respective five year average, while Silgan’s respective number grew by 14.5%. Comparing this number to market-cap competitors of the industry, Greif only saw a 3.67% growth in gross margins and AptarGroup actually saw a -3.08% decrease for the same time regarding gross margins.#p#???????#e#
What is also strong about Silgan is that sales growth rose 6.57% as a five year average to 11.11% in the past year. This number is not only above the industry average at 8.01%, but is above the five year average when the industry’s respective figures are not. This increase of 69.10% is greater than the 62.93% increase AptarGroup saw and also above the standard number of 11.01% Packaging Corp saw in the past twelve months. EPS growth over the past twelve months also grew almost 100?ove industry average, and better than competitors such as Grief which realized a negative EPS average last year. Moreover, capital spending as a five year growth rate of 5.51% for Silgan, while below the industry average at 7.06%, is much better compared to market-cap competitors, as the next best CAPEX spender was AptarGroup which only spent at a rate of 3.14% for the same time period. High spending on equipment and other restructuring products will only be beneficial in the future for Silgan, because not only will the company see economies of scale from added assets, but more cash to use later for investing purposes such as stock buybacks and dividend payouts. This is excluding the fact that Silgan has a trailing operating cash flow of near 400 million dollarsa number greater than both Greif and AptarGroup. Therefore, through the evidence given above, there is strong evidence that Silgan has matured quite nicely financially and should continue to do so in the future.
With respect to growth, what also makes Silgan appealing is the undervalued status many investors may appraise this stock. According to Reuters, Silgan has a forward P/E ratio of 15.06. Not only is this multiple lower than the trailing figure, but significantly lower than the industry multiple of 25.26 as well. Comparing this figure to other industry competitors, Greif (16.39), AptarGroup (19.11), and Packaging Corp (15.55) all have forward multiples greater than Silgan’s. In addition, Silgan’s share price also is low compared to sales, as a forward price to sales estimate of 0.66 is quite lower than the three aforementioned companies (Greif (0.72), AptarGroup (1.40), and Packaging Corp (1.15)). Because sales and earnings are quite high compared to the price, there is ample evidence that investors have not purchased shares rationally for Silgan, given the respective numbers for the three other companies. There is a significant opportunity to make capital gains now from these values.
Examining more intangible factors, the CEO of Silgan, Anthony J. Allot, and his 8600 employees have been using shareholder equity quite nicely. With higher net profit results, ROE has grown to 34.80% and ROI has been reported as 7.26% in the past twelve trailing months. ROE is greatly above the industry average at 21.29% and also above each of the three respective aforementioned company’s figures. A most recent quarter current ratio of 2.72 is significantly above the industry average at 1.49 and higher-than-average interest coverage ratio of 3.83 allows Silgan to carry more debt. Silgan also has a high asset (1.30) and receivable (9.12) turnover ratiomaking the company more efficient. All of these factors coupled with high growth and an oversold make Silgan very lucrative to the investor.
Overall there are many factors which make Silgan a great company to invest in. Besides the aforementioned attributes, Silgan also has a dividend yield of 1.28%–a great asset to contain during times of economic uncertainty. Technically speaking, while Silgan dropped past its simple moving averages a few weeks ago and has dropped in share price a bit, now may be a great time to purchase shares. Parabolic SAR is now above the share price, stochastic and RSI indicators are very lowsignaling an over sold price, and the MACD indicator also illustrates its two lines ready to converge. Therefore, along with the technical analysis, the fundamental and business plan Silgan provides is excellent for any investor and is a company worth looking into.