Sonoco Beats on Earnings by a Penny - Analyst Blog


Sonoco Products Co . ( SON ) reported first-quarter 2014 adjusted earnings of 52 cents per share, which rose 4% from 50 cents earned in the year-ago quarter and beat the Zacks Consensus Estimate by a penny. Earnings were within the company's guided range of 50-54 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.

The quarterly results excluded 2 cents per share of an after-tax charge related to restructuring activities. Including this, first-quarter 2014 earnings were 50 cents per share, up from 47 cents in the year-ago quarter, which excluded an after-tax charge of 3 cents per share related to restructuring activities and the impact of devaluation on reported results in Venezuela.

Operational Update

Net sales edged up 1% year over year to $1.18 billion in the quarter, falling short of the Zacks Consensus Estimate of $1.19 billion. Higher selling prices and sales from two small acquisitions in recycling and graphics management partially offset flat volumes and the negative impact of foreign exchange.

Cost of sales remained flat at $973 million. Gross profit went up 3% year over year to $212 million. Gross margin grew 50 basis points (bps) to 17.9%, driven by a positive price/cost relationship, manufacturing productivity improvements and lower pension expense. These were partially offset by a rise in maintenance, labor and other costs.

Selling, general and administrative expenses increased 3% year over year to $128 million due to wage inflation and higher management incentives. Sonoco's adjusted operating income rose 3% year over year to $88.5 million from $85.7 million in the year-ago quarter. Operating margin expanded 20 bps year over year to 7.5%.

Segment Performance

The Consumer Packaging segment reported net sales of $465 million, up 0.3% from $463 million in the prior-year quarter. Benefits from higher selling prices and incremental sales from the acquisition of a small graphics management business in the U.K. were partially offset by the negative impact of foreign exchange and slightly lower volume.

Operating profit grew 14% year over year to $48.2 million. The improvement came on the back of a positive price/cost relationship, productivity improvements and lower pension expense, somewhat offset by increased labor and operating costs.

Net sales at the Paper and Industrial Converted Products segment went up 0.3% year over year to $456 million. Higher selling prices and sales from a small recycling acquisition offset the lower volume and a negative impact from foreign exchange.

Operating profit however, declined 4% year over year to $29.7 million as negative impacts of severe weather on volume and energy costs, higher maintenance, freight and raw material costs offset the positive price/cost relationship, modest productivity improvements and lower pension costs.

Display and Packaging segment's net sales increased 6% year over year to $153 million from $144 million in the year-earlier quarter. Volume growth in the U.S. display and packaging, higher selling prices and sales from a small recycling acquisition offset the lower volume and a negative impact from foreign exchange.

Operating profit went up 53% year over year to $5.36 million driven by manufacturing productivity in retail packaging as well as volume gains.

Protective Solution segment's net sales dipped 4% year over year to $112 million. Lower volume in the industrial protective and temperature-assured businesses and the divestiture of a small box plant led to the overall decline. Operating profit at the segment declined to $5.3 million from $9.7 million in the year-ago quarter, primarily due to lower volume and higher costs as a result of severe weather.

Financial Performance

Sonoco ended the quarter with cash and cash equivalents of $191 million, down from $217 million as of 2013-end. Cash flow from operations was $45 million in the reported quarter, down substantially compared with $136 million in the prior-year quarter as higher GAAP net income was offset by changes in working capital and higher pension contributions.

The long-term debt of the company remained flat at $946 million as of the quarter-end compared with 2013-end. Debt-to-capital ratio was 36% as of Mar 31, 2014, flat compared with Dec 31, 2013. During the quarter, Sonoco repurchased 208,000 shares of its common stock for $8.6 million under a previously announced share buyback plan.

Sonoco's board of directors increased the quarterly dividend to 32 cents per share from the previous dividend of 31 cents per share. The increased dividend will be paid on Jun 10, 2014, to shareholders of record as of May 16, 2014. 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%. It is worth mentioning that 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.


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%.

Our View

Organic sales growth, geographic expansion and strategic acquisitions remain growth drivers for Sonoco. However, global economic factors and possible increase in raw material prices continue to be headwinds for the company.

South Carolina-based Sonoco is a global provider of a variety of consumer packaging, industrial products, protective packaging and packaging supply chain services. The company is also the largest producer of paper-based tubes and cores in North America.

At present, Sonoco carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include Crown Holdings, Inc. ( CCK ), Berry Plastics Group, Inc. ( BERY ) and KapStone Paper and Packaging Corporation ( KS ). All of these hold a Zacks Rank #2 (Buy).

BERRY PLASTICS (BERY): Free Stock Analysis Report

CROWN HLDGS INC (CCK): Free Stock Analysis Report

KAPSTONE PAPER (KS): Free Stock Analysis Report

SONOCO PRODUCTS (SON): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: BERY , CCK , KS , SON

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