Silgan: Initiating Coverage with a No-Moat Rating; Shares Look Expensive

We are initiating coverage on Silgan Holdings SLGN with a fair value estimate of $44 per share. After reviewing Silgan’s competitive advantages and its position in the packaging industry, we assign the company a no-moat rating. Silgan is the largest producer of steel and aluminum food cans in North America. The metal food can industry is highly concentrated as most regions are typically serviced by a few large competitors that maintain long-standing relationships and strong contracts with food producers. The company also operates a large packaging business where it sells dispensers, closures, and containers for a wide array of end markets. In recent years, Silgan has shifted its focus toward expanding its dispensing and closures business as demand for food cans in North America continues to decline.

We assign Silgan a stable moat trend rating because we don’t expect the firm’s competitive advantages to materially strengthen or weaken over the next five years. The metal food can industry in North America is split between a few large competitors that operate under long-term contracts. The long-term nature of the contracts limits a competitor’s ability to reliably fill new capacity as metal food can plants must operate at very high-capacity utilization to remain profitable. In Silgan’s dispensing and closure business, the firm produces largely undifferentiated products for a variety of end markets with little room to improve its competitive positioning in the next five years, in our view.

Silgan posted strong results in 2022 as strength in fragrance and beauty end markets drove margin expansion while volume declines were largely offset by higher selling prices. That said, the metal containers business faced pressures as pre-buy activity the year before and lower fruit and vegetable demand weighed on volume. Nevertheless, we expect Silgan’s pricing gains to slow and return to more normalized rates as demand normalizes across its end markets.