Time to Can Any Buying of Silgan; Company Appears Vulnerable as People Lose Taste for Food in Cans; Volumes have fallen by about 1% each year over the past decade with consumers buying more fresh food

October 21, 2013 Leave a comment

Time to Can Any Buying of Silgan

Company Appears Vulnerable as People Lose Taste for Food in Cans

JOHN JANNARONE 

Oct. 20, 2013 8:48 p.m. ET

Always popular, will SpaghettiOs outlive the metal cans they come in? The question came up recently when Campbell Soup, CPB -0.10% which makes SpaghettiOs, teamed up with Green Mountain Coffee Roasters GMCR +3.60% to offer “fresh brewed soup” in single-serve plastic cups. These could offer a simpler heating method than the stovetop or microwaving. Whether that works out or not, the food-can industry is struggling. Volumes have fallen by about 1% each year over the past decade, says the Can Manufacturers Institute. Headwinds include weak demand for soup and consumers buying more fresh food.One company that looks vulnerable is Silgan Holdings, SLGN +0.01% which accounts for half the U.S. food-can market. Silgan also makes plastic containers and tops, but the vast majority of its revenue and profit come from the food-can business.

This year, Europe’s Ardagh Group entered the U.S. market and won a contract withConAgra Foods. CAG -0.51% Analysts say Ardagh agreed to be paid much less than rivals would usually get. Such competitive pressure could squeeze Silgan’s margins, which already look ripe to fall. Analysts forecast an operating margin of 9.6% in 2013, just shy of its all-time peak.

Silgan has its strengths, such as an impressive history of buying smaller rivals and improving them. Resulting synergies around procurement and negotiating better deals with food companies tend to improve Silgan’s profits.

But there aren’t many targets left, and Silgan’s net debt is nearly 2.5 times earnings before interest, taxes, depreciation and amortization. Any higher would be aggressive for a company facing structural headwinds. The stock trades at 8.6 times next year’s Ebitda, well above its 10-year average of about seven times. Investors should leave it on the shelf

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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