Sonoco Cuts Outlook on Weak Demand - Analyst Blog


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Sonoco Products Co.  ( SON ) has tweaked its fourth quarter and fiscal 2011 expectations  blaming it on an unexpected drop in demand in its Tubes and Cores/Paper segment and a higher effective tax rate. The company is scheduled to announce its fourth-quarter results on February 9.

Sonoco now sees fourth quarter 2011 EPS in the range of 45 cents to 47 cents, down from the prior range of 59 cents to 63 cents. The current estimate reflects a year-over-year decline in the band of 20% to 24% from the prior-year EPS of 59 cents.  A projected 22.03% year-over-year drop brings the current Zacks Consensus Estimate to 46 cents, in line with the guided range.

For fiscal 2011, EPS is expected between $2.28 and $2.30. The company had announced a guidance range of $2.41 to $2.45 during its third quarter earnings call. The company had then lowered its guidance from the earlier range of $2.46 to $2.54 given a more cautious outlook on global economic conditions and the direction of consumer spending. The Zacks Consensus Estimate currently stands at $2.28, a 2.56% drop from the year-ago EPS of $2.234 and at the low end of the company's guided range.

Sonoco's North American and European Tube and Core/Paper operations suddenly witnessed a drop in demand in the last six weeks of the fourth quarter. On a same-day basis, tube and core volumes for the quarter dipped 7%. Given the dearth of orders, Sonoco took down its North American paperboard mill system for approximately 178 machine operating days in the fourth quarter, compared with 54 down days in the fourth quarter of 2011. Nearly 60% of the mills' downtime occurred in the last month of the quarter. In tandem, the Consumer Packaging segment experienced lower-than-expected volume in the quarter.

Sonoco also expects an approximate 39% effective tax rate, in place of its previous estimate of approximately 32% due to a bigger portion of the company's income being generated in higher tax jurisdictions and the unfavorable effect of timing differences on manufacturing deduction. Additionally, changing business conditions forced Sonoco to implement further cost-cutting initiatives. Consequently, it expects to record an after-tax charge of 10 cents per share in the fourth quarter, reflecting previously announced and additional restructuring activities.

Notwithstanding the dismal fourth-quarter outlook and the cut in 2011 EPS guidance, net sales for the full year are expected to rise 9% and EPS is touted to clock the third highest in the company's history.

Third-Quarter Recap

Sonoco's third-quarter results were also somewhat affected by volume decline but were countered by productivity improvements and lower selling and administrative costs. Thus, the third quarter EPS of 66 cents was a penny ahead of the year-earlier quarter. Revenues at the Tubes and Cores/Paper segment rose to $453.4 million from $412.3 million in the prior-year quarter due to higher selling prices and favorable currency translation. Operating profit at the segment however decreased 10% to $33.9 million as decline in volume, negative business mix, and wage inflation more than offset productivity improvements and lower pension, and selling and administrative expenses.

Sonoco is planning to report its fourth quarter and 2011 financial results in four reportable segments to reflect its changing business mix and the recent acquisition of Tegrant. Sonoco's reportable segments are expected to include Consumer Packaging, Paper and Industrial Converted Products, Packaging Services and Protective Packaging. Previously Sonoco reported financial results in three business segments - Consumer Packaging, Tubes and Cores/Paper, Packaging Services, along with a group of businesses called All Other Sonoco.

Our Take

Sonoco's Tegrant acquisition is not only the largest to date in the company's history, it has the potential to catapult the company as the leader in multimaterial protective packaging in North America. We believe Sonoco's strategy to grow through acquisitions, potential restructurings and increased focus on emerging markets will certainly bring long-term benefits.

However, raw material inflation, pension expense headwinds, high customer concentration and a still fragile construction industry will affect its financial results in the near term. The stock currently retains a Zacks #3 Rank (short-term Hold recommendation).

Hartsville, South Carolina-based Sonoco is a global manufacturer of consumer and industrial packaging products. The company has more than 300 operations in 35 countries throughout North and South America, Europe, Australia and Asia. Sonoco competes with  Bemis Company Inc.  ( BMS ) and  Rock-Tenn Co.  ( RKT ).

BEMIS ( BMS ): Free Stock Analysis Report
ROCK-TENN CO ( RKT ): Free Stock Analysis Report
SONOCO PRODUCTS ( SON ): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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