Small Cap Watch List (Track at Marketocracy) member Silgan (SLGN - Annual Report) reported second-quarter revenue of $683.6 million and earnings per share of $0.74 excluding a $0.04 restructuring charge. Analysts were expecting $0.72 on $670 million in shares. My earnings preview had called for an upside surprise, and the PPI data offered support for the thesis. So given that I was right on the positive outlook, why is the stock declining?

The answer, as is often the case, lies in the guidance for next quarter and the rest of the year:

Based on the year to date financial performance and the outlook for the remainder of 2007, the Company reconfirmed its adjusted net income per diluted share estimate for 2007 in the range of $3.15 to $3.25 per diluted share. The current full year estimate includes the negative impact on comparative earnings of reducing levels of provisional inventory which benefited results when it was built in the fourth quarter of 2006 and the first quarter of 2007.

The Company expects adjusted net income per diluted share for the third quarter of 2007 to be in the range of $1.15 to $1.25, as compared to adjusted net income per diluted share of $1.19 in the third quarter of 2006.

When you beat estimates by $0.02, analysts don’t want you to “reconfirm” guidance - they want you to raise it, and preferably by more than the $0.02 that is already in the bag. Particularly when their estimates of $3.30 were already outside the guidance range. The third quarter guidance midpoint is also a penny below the current consensus of $1.21.

I think the PPI data will continue to support the business, and that the current guidance is probably still conservative (although the street estimates may have gotten ahead of themselves.)  The stock has had a nice run over the last year, and probably needed significant earnings surprise to drive it further. Today’s breather should let the stock price get back in line with the fundamentals.