Sonoco Remains at Neutral - Analyst Blog


On Nov 29, we reiterated our Neutral recommendation on Sonoco Products Co. ( SON ), a global manufacturer of consumer and industrial packaging products. We reiterated our recommendation owing to uncertainty among its customers given the slow recovery in the U.S. and ongoing European weakness. However, productivity gains, addition of new products and geographical expansion, Energizer contract as well as prospects of further such wins, and price increases are some positives.

Why Reiterated?

Adjusted earnings per share for Sonoco Products increased 14% to 63 cents in the third quarter. Net sales increased 3% year over year to $1.23 billion in the third quarter driven by gains in volume and mix from the Display and Packaging, Paper and Industrial Converted Products and Protective Solutions segments along with higher selling prices, partially offset by a decline in volume in the Consumer Packaging segment and the divestiture of box plant.

Sonoco narrowed its 2013 EPS guidance to $2.27-$2.31 from $2.26 to $2.32. The guidance assumes no notable change in the level of economic activity, but does factor in seasonality, including the normal drop off in activity in December. It also assumes that OCC (Old Corrugated Containers) prices remain in the $125 range through the balance of the year, and effective tax rate is expected to be around 33% in the fourth quarter.

After having a difficult run following the recession, the Display and Packaging segment results have improved in 2013 driven by volume increases in both international contract packaging and U.S. display and packaging services. Furthermore, the new contract from Energizer Holdings Inc. ( ENR ) that was awarded in April has also supported results.

The Energizer contract is a major win for Sonoco, as it will leverage Sonoco's other segments in supplying e-packaging material and will also provide packaging services. Sonoco foresees additional opportunity for other similar contract wins going forward. Furthermore, the pick-up in promotional activity at the customer level signals increased volume.

The Consumer Packaging business generated operating margins above 10% for the second straight quarter in the third quarter after generating margins in the 9% range for four consecutive quarters. This was driven by continued price/cost benefits resulting from two previously announced price increases on composite cans as well as continued productivity gains.

The company expects further productivity gains from the closure of a thermoforming facility and improvement in its blow-molding operations. Overall, price/cost benefits, productivity gains, addition of new products, and geographical expansion are expected to boost Consumer Packaging results going forward.

In November, Sonoco announced a price hike in fabricated packaging and corrugate packaging, effective Jan 1, 2014, to combat increase in costs of resin and corrugated linerboard as well as rising energy costs.

On the flipside, slow recovery in the U.S. and ongoing European weakness remain headwinds for the company in fiscal 2013. Over the next three to four 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%. Achieving these goals will be challenging in the current low growth environment.

Other Stocks to Consider

Sonoco currently retains a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Sealed Air Corporation ( SEE ) and Packaging Corporation of America ( PKG ). All these stocks hold a Zacks Rank #2 (Buy).

ENERGIZER HLDGS (ENR): Free Stock Analysis Report

PACKAGING CORP (PKG): Free Stock Analysis Report

SEALED AIR CORP (SEE): 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 The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: ENR , PKG , SEE , SON

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