We have downgraded our recommendation on
Sonoco Products Co.
) from Neutral to Underperform, given the reduction in its 3Q12 EPS
guidance, weak volumes, volatile raw material prices and
uncertainty among its customers, given the slow recovery in the U.S
and ongoing European weakness, and higher pension costs. Currently,
the stock retains a Zacks #5 Rank, implying a short-term Strong
Looking at the second quarter numbers, Sonoco's second-quarter
2012 adjusted earnings per share decreased 3% to 58 cents, but net
sales increased 6.6% to $1.2 billion. While EPS was in line with
the Zacks Consensus Estimate, revenue failed to beat the same. The
improvement in sales was attributable to the acquisition of Tegrant
Corp., partially offset by lower volume and currency translation
Sonoco has recently trimmed its third quarter EPS guidance on
the back of operating problems in its North American papermaking
operations, which led to unscheduled downtime, thereby resulting in
excess costs. Compared with the prior-year third quarter earnings
of 66 cents, Sonoco's new guidance reflects an annual decline of
20% to 23%, down from the previous expectation of a decline 6% to
Sonoco has experienced lower-than-expected volume in many of its
consumer and industrial businesses. Region wise, Sonoco continues
to experience weakness in Europe and slower-than-expected volume in
South America and China. In China and Latin America, the company
does not expect any meaningful recovery in volumes in the near
In the consumer business, weak composite can volumes as well as
softness in certain thermoformed product lines will likely continue
through the rest of 2012.
Furthermore, volatile raw material prices and uncertainty among
its customers, given the slow recovery in the U.S and ongoing
European weakness remain headwinds for the company in fiscal 2012.
Considering that Europe contributes 17% of Sonoco's sales and given
the economic scenario in Europe, we believe volume growth in the
region will remain muted for some time.
Sonoco contributed $142 million toward pension contribution in
2011. The aggregate unfunded position of the company's various
defined benefit plans stood at $334 million at the end of 2011.
The company paid $59 million as pension contribution during
the first half of 2012 and plans additional contributions of around
$13 million during the second half, bringing total contributions
made during 2012 to approximately $72 million.
Furthermore, in 2012, pension expense is expected to be higher
at around $14 million compared with the 2011 levels. Further
changes in the discount rate or lower-than-expected returns could
increase pension expense in the future and necessitate additional
Hartsville, South Carolina-based Sonoco is a global manufacturer
of consumer and industrial packaging products. The company has
around 340 operations in 34 countries throughout North and South
America, Europe, Australia, and Asia. The company operates through
four segments - Consumer Packaging, Paper and Industrial Converted
Products, Packaging Services and Protective Packaging.
SONOCO PRODUCTS (SON): Free Stock Analysis
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