On May 10, we maintained our Neutral recommendation on
Sonoco Products Co.
), a global manufacturer of consumer and industrial packaging
products based on its organic sales growth, geographic expansion
and strategic acquisitions. It was offset by concerns regarding
volatile raw material prices and uncertainty among its customers
given the slow recovery in the U.S. and ongoing European
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Adjusted earnings per share for Sonoco Products declined 4% in
the first quarter to 50 cents, while net sales dipped 3% to
$1.179 billion. The year-over-year decline in sales was
attributable to lower volume and selling prices in Consumer
Packaging and Paper and Industrial Converted Products segments
partially offset volume improvement and sales price gains in the
Display and Packaging and Protective Solutions segments.
The company expects second quarter earnings per share between 56
and 60 cents, and guided full year earnings in the range of $2.26
to $2.32 per share.
The company expects to increase sales to $5.5 billion to $6
billion over the next three to four years, increase base earnings
per share annually by approximately 10% and increase return on
net assets employed to 12.5%. Growth drivers continue to be
organic sales growth, new product sales, geographic expansion and
Sonoco's largest ever acquisition was of Tegrant, a leading
provider of highly engineered, protective, temperature-assured
and retail security packaging solutions in 2011. The company also
made significant progress integrating Tegrant, successfully
achieving targeted synergies and further expanding its new
Protective Solutions segment. With the benefit of the Tegrant
acquisition Sonoco was able to generate record sales and gross
profits in 2012 and was able to significantly improve free cash
Sonoco has announced price increases in its Industrial, Consumer
Packaging and Protective Solutions businesses and expects it to
offset higher operating and raw material costs. Sonoco has
recently been awarded a contract from Energizer for the primary
packaging, retail display assembly and fulfillment of a segment
of battery products for Energizer brands. This should help
packaging by roughly $20 million. The first shipment was
delivered in March, with complete ramp up of operations expected
to occur through the second quarter of 2013.
On the flipside, in the first quarter, the Consumer Packaging
segment's sales dipped 6.5% and operating profit declined 15% due
to lower volume throughout the segment and lower sales prices,
particularly in flexible packaging and plastics. The volume
decline reflects softness in the European economy, negative
churn, and market shrinkage in several packaging categories due
to changes in customer preferences at both the retail and
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. Europe contributes 17% of
Sonoco's sales and given the scenario in Europe, we believe
volume growth in the region will remain muted for some
time. Furthermore, in 2013, pension expense is expected to
be higher compared to 2012.
Other Stocks to Consider
Other companies in the packaging and containers industry with
favorable Zacks Ranks are
Bemis Company, Inc.
Berry Plastics Group, Inc.
Graphic Packaging Holding Co.
) all of which carry a Zacks Rank #2 (Buy).