Silgan Shares to Stay Contained
Silgan Holdings, Inc. SLGN) commands a strong market share position in the food can industry that leads to its pricing power. Thus, the company is able to offset high resin costs with continuous price hikes and has also gained market share through acquisitions.
Besides, we expect new and innovative product launches in the closures business will boost volume. Silgan is also working toward improving margins by enhancing productivity and successfully rationalizing and integrating acquisitions made over the last couple of years. However, the company has been struggling with continued low metal food and plastic container volumes. Thus, we retain our Hold rating on the shares.
Currently, Silgan shares trade at 15.5x our 2008 EPS estimate of $3.68, which is at a slight discount to the industry median multiple of 15.9x. We do not expect a large expansion in P/E multiple considering the company's lower growth rate as compared to its peers. Applying a P/E multiple of about 16.0x to our 2008 EPS estimate, we arrive at a target price of $59.
Expect Kroger to Track Market
We believe the combination of rising food prices, rising gas prices, and market share gains should help boost
Kroger Co.'s (
KR) top line in the first quarter. However, we don't expect higher sales to translate into higher profit, due to continued pressure on profit margins. We maintain our Hold rating as the stock looks fairly valued at current levels.
Kroger's bull story is supported by its solid top-line growth, operating cost controls, and improving financial health. Several years ago, Kroger implemented a strategy to attract customers with lower prices. This strategy has been the main driver behind its solid sales growth over the last few years. Kroger has used the cash flow generated from its solid sales growth and steady operating margins to improve its balance sheet and return value to shareholders.
However, we remain concerned with Kroger's contracting gross margins, inflationary pressures, and labor issues. The company's sales growth improvements have come at the cost of its gross margins.
What's more, we don't believe Kroger will able to reverse its gross margin deterioration because the highly competitive environment in the grocery business. The business has simply become too price sensitive. This environment is also making it difficult for Kroger to pass along higher product costs, which could pressure sales or hurt gross margins.
Kroger shares are trading at 14.8x our fiscal year 2008 EPS estimate and 13.6x our fiscal year 2009 EPS estimate. We think this valuation is fair and believe the stock's performance over the next six months will track the return of the S&P 500.
