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The Fair Value Report

Silgan Holdings

My Disclaimer
I am a long-term, buy and hold investor, practicing a value investing philosophy. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company’s most recent Annual Report on Form 10-K.

Risk
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

What They Do
Silgan Holdings is manufacturer of rigid packaging for consumer goods products. Products include steel and aluminum containers for human and pet food and general line products, metal and plastic closures and dispensing systems for food, beverage, health care, garden, personal care, home and beauty products, and custom designed plastic containers for personal care, food, health care, pharmaceutical, household and industrial chemical, pet care, agricultural, automotive and marine chemical products. Industry peers include Crown Holdings, Inc. (NYSE: CCK) and Ball Corporation (NYSE: BLL).

Acquisitions Highlights
The company listed no new business acquisitions in its most recent Annual Report on form 10-K.

Divestitures Highlights
The company listed no new business divestitures in its most recent Annual Report on form 10-K.

Subsequent Events
In January 2020, the company made a binding offer to Twist Beauty Packaging S.A.S., to purchase all the outstanding securities of certain subsidiaries in the seller’s dispensing business and certain assets related to the sellers’ dispensing business in China for an aggregate purchase price of $900 million in cash. In addition, in February 2020, the company acquired Cobra Plastics, Inc., a manufacturer of injection molded plastic closures for a wide variety of consumer products, with a particular focus on the aerosol overcap market for an undisclosed amount.

Short-Term Target
My current short-term target for the stock is $37.72 with an initial trailing stop set at $36.37. Based on a recent price of $36.92, upward price movement will find resistance at $37.63 and again at $38.35, with final resistance found at $39.49. Downward price movement will find support at $35.30 and again at $33.66, with final support found at $32.99.

One-Year Growth Price Target
My one year growth price target is actually a price target range, determined by adding year over year earning growth to the prior year annual dividend yield and dividing the result by the current annual price to earnings ratio.

For this stock, my current one year growth price target range is $38-$39.

Volatility Adjustment
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market.

Basis my current beta ratio for this stock of 0.72, my volatility adjustment to recent pricing is $14 per share, making my current volatility adjusted price $51.

Quality of Earnings
A company’s earnings can be impacted by a variety of sources unrelated to the company’s current day to day operations. Discontinued operations, tax refunds, depreciation, and impairment for example, may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts.

Of the company’s $2.11 in earnings per share, $0.00 came from some combination of other sources, income taxes, interest, minority interests, or discontinued operations.

Key Performance Indicator Rating
I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Based on a 0-105 scale, my KPI for this company is 50.

Five Year Growth of $10K
Had you invested $10K in this company five years ago (12/31/14), you would have received 373 shares of stock with a cost basis of $26.80 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $31.21 per share. During that holding period you would have collected $196 in regular and special dividends, and your initial $10K investment would have returned to you $11,646 a loss of 16% excluding regular and special dividends.

Annual Shareholder Return
I calculate annual shareholder return by subtracting the stock price at the close of business on the last day of a company’s fiscal year, from the stock price at the start of business on the first day of the company’s fiscal year, plus any dividends paid during that period, and then dividing the result by the opening stock price on the first day of a company’s fiscal year.

For fiscal 2019, the company spent $0.25 per share buying back company stock, paid a common stock dividend of $0.46 per share, and had year-over-year annual price appreciation of $7.59, which created a year-over-year annual shareholder return of 34%.

Over the prior five year period, the company spent an average of $1.73 per share buying back company stock, paid an average annual common stock dividend of $0.56 per share, and had an average annual price appreciation of $(0.08), which created an average annual shareholder return of 3%.

Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium.

My cost of common equity for this stock is 3.61%.

Insider Transactions
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 38 insider trades involving 2,296,927 shares of stock. Of those insider trades, 20 were Buys involving 681,922 shares of stock, and 18 were Sells involving 1,615,005 shares of stock, creating an insider buy to sell ratio of roughly 0.4 to 1..

The Year-Over-Year Numbers
There are many year-over-year numbers for investors to focus on. But to me, there are only a handful that have any significant meaning, and so those are the numbers that I focus on in this space. Please remember these are year-over-year numbers.

For fiscal 2019, revenue growth increased 1%, earnings increased 5%, free cash flow increased 0.5%, and debt decreased by 3%. Additionally, the company’s annual operating ratio, which I calculate by adding operating expenses to the cost of goods sold and dividing the result by net sales, was 93%.

Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt.

For this company my enterprise value (market cap plus debt less cash) is $55 and my equity value (market cap plus cash less debt) is $18, making my Enterprise to Equity ratio, 0.33.

Risk/Reward Ratio
I determine my risk reward ratio by subtracting my current terminate target from my current initiate target and then dividing that result by my initiate target less a price fluctuation variable of 10%. What I am looking for with this ratio is a value of 3 or greater. My risk/reward ratio for this stock is 1.3.

Prior Five Year Averages
My average valuation for the prior five year fiscal period was $30. The stock price during that time period averaged $26, earnings averaged $2.74 per share, and the average PE Ratio was 10. The current PE Ratio is 17.

Fair Value Investing
It is important to remember that the current market price of an equity is the price negotiated between a willing buyer and a willing seller. This market price is not the fair value of the associated company, but the negotiated price of a single equity trade.

The basic investing tenet for a fair value investor is price determines return. As such it is important to have some understanding of the value of the company as an on-going concern, and to develop a strategy that, with current value in mind, will allow investment in that company at some reasonable discount to current pricing.

My most recent fair value estimate for the stock of this company as an on-going concern is $27. This estimated fair value forms the basis for my target prices as shown on my worksheet.

Silgan Holdings, Inc. (NYSE: SEE) – FYE 12/2019 – REDUCE – The stock is currently trading at levels at or above my most recent $34 reduce target, but below my most recent $43 terminate target. Please See Linked PDF Worksheet.

Thanx for reading.

Wax
Revised on 09/20/2020