Silgan Earnings: Persistent Inventory Destocking Weighs Heavily on Packaging Demand

No-moat-rated Silgan Holdings SLGN reported a lackluster third quarter as volumes fell across much of its business. Silgan continues to navigate a challenging operating environment, with persistent inventory destocking, specifically in food and beverage end markets, weighing heavily on results. While we expect inventory destocking trends to gradually abate over the next few quarters, Silgan faces significant challenges across its portfolio. As such, we’ve decreased our fair value estimate to $40 from $42 per share due to lower near-term revenue and profitability in our forecast.

Silgan’s metal container business reported mixed results in the quarter as revenue declined 8% year over year when excluding the impact of Russia sales. The decrease in revenue was entirely tied to volume, which fell 10% from a year ago as metal containers continued to experience rigorous destocking along the supply chain. This was most prominent in pet food end markets, which had held up well for most of the year but are now experiencing similar inventory management and destocking trends. The dispensing and specialty closures business fared better in the third quarter despite challenging macroeconomic conditions. Net sales fell 3% from a year ago while operating margins expanded 20 basis points to 14%. Volume contracted roughly 3% during the quarter, but a mix shift toward higher value dispensing products provided a boost to margins. That said, Silgan continues to navigate softening demand for food- and beverage-related closures amid increasing inflationary pressures on consumers.

Management once again lowered full-year adjusted earnings per share guidance, now expecting $3.35 (midpoint) from $3.50. Given the current macroeconomic headwinds affecting volumes across Silgan’s portfolio, this revision is unsurprising to us. Nevertheless, we expect Silgan will face a difficult fourth quarter but should see some relief going into 2024 as the pace of inventory destocking slows.