We maintain our Neutral recommendation on
Sonoco Products Co.
), a global manufacturer of consumer and industrial packaging
Sonoco's first-quarter 2012 adjusted earnings per share
decreased 9.6% to 52 cents. Net sales increased 8.5% to $1.21
billion. Both were ahead of Zacks Consensus Estimates.
Sonoco aims to grow sales to between $5.5 billion and $6 billion
over the next three to four years, improve margins to 10% to 10.5%
and increase return on net assets employed to 12.5%. Growth drivers
continue to be organic sales growth, geographic expansion and
Sonoco's recent acquisition of Tegrant, a leading provider of
highly engineered protective, temperature-assured and retail
security packaging solutions, is the largest in the company's
history. The $550 million deal will position Sonoco as the leader
in multimaterial protective packaging in North America. The
combined entity is estimated to generate sales of approximately $5
billion in 2012 and Sonoco estimates synergies of $12 million.
Future acquisitions are targeted to add up to $500 million more in
Sonoco's target is to be the global leader in
customer-preferred, low-cost packaging solutions within targeted
customer market segments. Due to the cost-competitive nature of its
businesses, Sonoco regularly evaluates its cost structure. During
2011, Sonoco announced closures of a flexible packaging facility in
Canada, a thermoformed plastic packaging facility in Canada, a tube
and core facility in France, and a fulfillment service center and a
point-of-purchase display manufacturing facility in the United
States. In addition, the company divested two small businesses, a
plastics operation in Brazil and a tubes and cores operation in the
United States, and realigned its fixed cost structure.
Sonoco has hiked its quarterly dividend from 29 cents to 30
cents a share or $1.20 per share annually, representing a yield of
around 3.7%. The company's objective is to deliver average annual
double-digit returns to shareholders over time. Sonoco thus focuses
on three major areas - driving profitable sales growth, improving
margins and leveraging its strong cash flow and financial
However, on the flipside, volatile raw material prices and
uncertainty among its customers, given the slow recovery in the
domestic market and ongoing European weakness, remain headwinds for
the company in fiscal 2012.
Furthermore, given the magnitude of the Sonoco and Tegrant
merger, integration risks continue to be a challenge. In addition,
Sonoco's failure to realize synergies from the acquisition could
negatively impact the company's earnings.
We thus have a long-term Neutral recommendation on Sonoco.
However, in the near term, the stock retains a Zacks #2 Rank
(short-term Buy rating).
Sonoco has 349 operations in 34 countries throughout North and
South America, Europe, Australia and Asia. The company now reports
its financial results in four reportable segments: Consumer
Packaging, Paper and Industrial Converted Products, Packaging
Services and Protective Packaging. It competes with the likes of
Bemis Company, Inc.
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