Silgan Holdings Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Silgan Holdings Inc. is a leading manufacturer and supplier of rigid packaging solutions for consumer goods products, with a diversified presence in North America, Europe, Asia, and South America.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Silgan Holdings operates in the competitive packaging industry.

  • Revenues by Segment: The company operates through three main segments, each contributing a significant portion of its overall revenue. The Dispensing and Specialty Closures segment produces a variety of dispensing systems and specialty closures for diverse markets like food, beverage, healthcare, beauty, and home care. Metal Containers focuses on metal food containers, while Custom Containers makes packaging for varied product categories.
  • Geographic Reach: The company has a broad global reach, with manufacturing facilities located in North America, Europe, Asia and South America. This wide reach enables the company to cater to different geographical markets.
  • Competitive Landscape: The rigid packaging industry is highly competitive. In addition to facing competition from other large companies, they also must compete with the changing prices of raw materials. This competitive industry is impacted by several factors that create a complex environment.
    • Intense competition exists due to the low margins and the high number of competitors.
    • High commodity prices force the companies to constantly adapt. This means that management has to continually find ways to cut costs, such as by finding lower-cost suppliers, improving operational efficiency and automating processes.
    • A constantly changing industry means that manufacturers have to innovate and produce more sustainable products due to changing regulations and growing customer needs.
    • Recessions can reduce consumer spending and cause supply chain issues.

Financial Analysis

SLGN’s financial health is a mix of solid performance and some points of concern.

  • Revenue Trends: Silgan has shown an overall growth trend, driven mostly by acquisitions and organic growth. In 2023, it achieved a revenue of $5.9 billion and in 2022, its revenue was $6.4 billion, which was an 8% increase year over year. This shows a pretty good ability to expand and continue growth. However, there is a projected 0.2 decrease in net sales in 2024, due to various reasons such as the effect of inflation, higher interest rates, and increased competition.
  • Profitability & Margins: While the company can produce a significant volume of products, it seems to be struggling to convert that into profits. Operating margins are weak and fluctuate from year to year. In 2023, it reported a gross profit margin of around 18%, but this has fallen in recent years (it has been closer to 20%). This indicates that while the company can make a lot of sales, they are not generating profits relative to that.
    • Gross profit margin decreased in each of the main segments of business. These margin declines in 2023 were due to higher material prices and decreased sales.
  • Debt: The company’s debt is very high, with more than $3.4 billion of net debt on the balance sheet, which is more than the company’s market capitalization. While the company can service the debt using the income from operations, it is very important to look at this part, since debt adds a lot of risk.
  • Free Cash Flow (FCF): Cash flows are impacted by their high investment requirements, as many of the business lines are capital intensive. The company has managed to remain FCF positive. For example, In 2023 the FCF was $402 million, compared with $748 million in 2022.
  • Capital Allocation: Management continues to pursue a strategy of acquisitions. In 2023 they spent about $179 million and $600 million in acquisitions, respectively, in 2022. While the company has acquired good businesses, it is important to note that acquisitions may not always generate the returns that are expected, and, instead, sometimes increase risks.

Moat Analysis

SLGN’s competitive advantage is hard to define and seems weak at best.

  • Intangible Assets: The company owns a large portfolio of patents, mostly in plastic and composite closures. It also owns a collection of trade names and brand names, such as plastic closures used in yogurt, sauces, edible oils, and water bottles. This isn’t much of a moat, because there is nothing unique about the products themselves. Even though the names are well-known, they don’t create any type of pricing power or customer stickiness. Most of the products are easily substitutable by the competition.
  • Switching Costs: The company’s products do not have any meaningful switching costs for their customers. It may cost money and time to switch suppliers, but it doesn’t rise to the level of high switching costs that would ensure customer stickiness.
  • Cost Advantage: The company has made moves toward becoming more cost-efficient, such as by cutting costs in supply chains and using cheaper inputs. It has also improved operational efficiency. However, as is the case with most companies, any cost advantages gained will also be easily replicable by the competition, thus lowering their impact.
  • Network Effects: There is no clear network effect present in the company’s business.
    • Due to a combination of lack of differentiation, relatively low switching costs, and low barriers to entry in many subsectors of the industry, the company isn’t able to effectively build a strong moat.

Moat Rating: 2/5 Given the weak and easily replicable competitive advantages, I am giving the company a moat of 2. Although the company has decent historical returns on capital, there is not sufficient moat to defend them in the future, given the very competitive industry.

Risks

Several risks could impact the business and its moat.

  • Competition: The most important factor affecting the business is the intense competition. This is an ever-present threat that will continue to hurt profitability if management is unable to establish a strong advantage.
  • Raw Materials: Input costs can fluctuate dramatically and cause a great hit to the company’s bottom line. The company may or may not be able to pass these price increases to the end customers, and if the company doesn’t pass them, it may lead to margin compression.
  • Acquisition Integration: Since acquisitions make up a significant part of the company’s growth, any failures to integrate acquisitions effectively may hurt future profitability.
  • Debt: The high amount of leverage, though manageable, creates a significant risk. If sales slow down or interest rates increase further, the company will face an increase in the risk of bankruptcy.
  • Global Disruption: Factors such as global pandemics or wars can cause a huge impact, and can disrupt supply chains and consumer behavior.
  • Pension Obligations: As the company has many employees, pension obligations may be difficult to manage and can lead to higher operating expenses, impacting profitability.

Business Resilience: Given the factors listed above, and mostly due to a lack of pricing power and strong sustainable advantages, the company is susceptible to downturns and economic headwinds.

Understandability Rating: 2/5 The business is somewhat complex to understand. The different segments, with different customers and their ever-changing dynamics make the business more complicated than a simple retail or manufacturing company. Understanding the complex financial statements that come with multiple acquisitions, subsidiaries, and complicated financing structure is also hard. Therefore, I am giving a rating of 2.

Balance Sheet Health Rating: 3/5 Although the company is generating positive FCF, it has a high amount of debt, which makes the rating to lean more on the unhealthy side. The large number of acquisitions, also, may further complicate matters. The company’s asset base is stable, and given the long term contracts with customers, the company is unlikely to face a liquidity crunch. For these reasons, I am giving a rating of 3.