On Jun 6, 2014, we issued an updated research report on
Sonoco Products Co.
), a global manufacturer of consumer and industrial packaging
Sonoco's first-quarter 2014 adjusted earnings increased 4% to 52
cents per share and beat the Zacks Consensus Estimate by a penny.
Earnings were within the company's guided range of 50 cents to 54
cents. A positive price/cost relationship, modest productivity
improvements and lower pension and interest expenses helped offset
lost production and sales due to severe winter weather across the
U.S. and Canada.
For full-year 2014, Sonoco reiterated its earnings per share
guidance range of $2.43 to $2.53. Free cash flow is anticipated to
be around $130 million for 2014. Sonoco expects second-quarter 2014
earnings per share in the range of 63-67 cents. Compared with 59
cents earned in the prior-year quarter, this reflects annual growth
of 7% to 14%.
After having a difficult run following the recession, the Display
and Packaging segment's sales and profit improved in 2013 and the
momentum has continued in the first quarter of 2014 as well. This
is driven by volume increases in both international contract
packaging and the U.S. display and packaging services. Furthermore,
the new contract from
Energizer Holdings Inc.
), awarded in April, has also supported results.
The annual $20 million Energizer contract entails the primary
packaging, retail display assembly and fulfillment of a segment of
battery products for Energizer brands. This contract is a major win
for Sonoco, as it will leverage Sonoco's other segments in
supplying e-packaging materials and will also provide packaging
services. Sonoco foresees opportunity for other similar contract
wins going forward. Furthermore, the pickup in promotional activity
at the customer level signals increased volume outlook for
Sonoco's board of directors marginally increased the quarterly
dividend to 32 cents per share from the previous payout of 31 cents
per share. The company has increased its dividend for 32
consecutive years. On an annual basis, Sonoco's new dividend payout
is $1.28 per share, an increase of 3.2% and a yield of
approximately 3%. Sonoco's dividend yield is one of the highest
payouts provided by any U.S. packaging company and is about 50%
higher than the yield of the S&P 500.
As of the quarter end, 4.6 million shares remain available for
repurchase under its 5 million share repurchase authorization.
Further dividend hikes and share repurchases will boost shareholder
value, thus providing support to the stock.
The severe winter weather in January and February significantly
disrupted Sonoco's operations as well as its customers'. However,
with the weather improving, the company noted a significant rebound
in demand followed by a return to a more normal and expected level
of sales orders in March. Although overall volume was essentially
flat, second-quarter earnings benefited from a 50 basis point
increase in the company's overall gross margin due to a positive
Over the next 3 to 4 years, Sonoco aspires to improve sales to
between $5.5 and $6.0 billion, increase base earnings per share
annually by approximately 10% and increase return on net assets
employed to between 11% and 12%. We believe achieving these goals
will be challenging in the current low-growth environment.
The Alloyd business, previously part of Sonoco's Protective
Solutions segment and now part of Display and Packaging, is
continuing to perform below expectations. Alloyd was part of the
$550 million Tegrant acquisition in late 2011. In 2013, Alloyd lost
some businesses and incurred an operating loss of $4 million per
year. Backed by some recent business wins, management expects
breakeven results in 2014. However, returning to profitability will
Management stated that while volume will remain affected for the
balance of 2014, the company must manage energy and raw material
costs as the price of certain resins have increased and old
corrugated containers' (OCC) price may peak this summer.
Other Stocks to Consider
At present, Sonoco carries a Zacks Rank #3 (Hold). Some
better-ranked stocks in the same industry include
Graphic Packaging Holding Company
Sealed Air Corporation
), both with a Zacks Rank #2 (Buy).
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