Silgan Earnings: Near-Term Challenges Mount as Customers Reevaluate Inventory Levels

No-moat-rated Silgan Holdings SLGN reported underwhelming second-quarter results as volumes continued to contract amid inventory management initiatives by customers. Net sales decreased over 7% year over year as all three segments experienced declines in volume. While management noted inventory destocking trends have largely subsided, we expect volumes will remain pressured through the end of the year as challenging market conditions weigh on consumer demand. As such, we’ve decreased our fair value estimate to $42 from $44 per share due to lower near-term revenue and profitability in our forecast.

Silgan’s metal container segment fared better than its other segments, with revenue decreasing roughly 3% year over year when excluding the impact of Russia sales amid a 4% decline in volume. Despite this pullback, the segment reported a 10.4% operating margin, which is a 160-basis-point increase from a year ago, largely due to the delayed pass through of higher costs. While the current operating environment creates challenges for Silgan, we expect the metal containers business will continue to benefit from stable demand in pet food despite normalizing food can volumes. The dispensing and specialty closures segment faced persistent pressure in the second quarter as volumes declined 6%, driven by weakness in European food and beverage end markets. Management noted that consumers have begun to show signs of trading down to lower-cost products in some regions, which could have an adverse impact on its higher-value closures in the second half of 2023.

Given the current macroeconomic environment and second-quarter performance, management lowered its full-year adjusted EPS guidance, now expecting $3.50 (midpoint) from $4.05 previously. Management’s new guidance appears attainable given the relative strength in metal containers, but we expect volumes to remain pressured in the second half of the year amid additional inventory management initiatives and softening European demand.