Here's Why You Should Hold On to Sonoco Stock Right Now

Sonoco Products Company SON is poised to gain from its consumer packaging business, focus on productivity improvement and cost-control initiatives. A strong balance sheet also enables the company to invest in growth and acquisitions. However, high material costs and the coronavirus pandemic’s unfavorable impact on the company’s operations are concerns.

Sonoco currently carries a Zacks Rank #3 (Hold). It has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities for investors.

The company has an estimated long-term earnings growth rate of 5%.

Positive Earnings Surprise History

Sonoco has a trailing four-quarter average earnings surprise of 4.94%

Cheaper Valuation

The trailing 12-month EV/EBITDA ratio is 8.0 for the company, while the industry's average trailing 12-month EV/EBITDA ratio is 21.3.

Superior Return on Assets

Sonoco currently has a Return on Assets (ROA) of 6.7%, higher than the industry’s 4.9%. An above-average ROA denotes that the company is generating earnings by effectively managing its assets.

Growth Drivers in Place

Sonoco expects the Consumer Packaging segment to perform well in the current quarter as sales from food packaging will continue to benefit from the stay-at-home customers. Approximately 80% of the segment’s sales come from food packaging where the company is witnessing increased orders. Further, paperboard operations in North America are likely to be relatively steadier as elevated demand for the tissue and the towel market will help offset declines from some industrial converted-product businesses.

Further, the Protective Solutions segment, which serves automotive and appliance markets, is likely to witness improved demand in the September-end quarter, as these markets are gradually recovering. The ThermoSafe temperature-assured packaging business is likely to gain from a strong flu vaccine season, and improved demand from its base pharmaceutical and food customers during the ongoing quarter.

Sonoco’s focus on optimizing businesses through productivity improvement, standardization and cost control will also aid its performance in the near term. In addition, stable Old Corrugated Containers (OCC) price is likely to offset negative impacts of price/cost, improving operating margins in the third quarter.  The company is focused on driving growth, margin expansion and generating solid free cash flow. Sonoco’s balance-sheet strength and availability of substantial liquidity in the form of cash and revolving credit facilities place it well to sail through the current crisis. Sonoco is also focused on acquisitions in the targeted growth areas of flexible packaging and thermal formed rigid plastic containers, and development of new products.

Few Headwinds to Counter

The company has issued guidance for third-quarter 2020. It expects adjusted earnings per share between 73 cents and 83 cents compared with earnings of 97 cents per share reported in third-quarter 2019. The guidance reflects challenging economic conditions resulting from the coronavirus pandemic. Even though the company expects gradual improvement in global macroeconomic environment, recovery in demand might be short lived due to the resurgence of coronavirus cases, slowing the reopening of business activities. Moreover, the negative impact of foreign-currency translation and higher interest expenses will hurt bottom line during the September-end quarter.

Furthermore, Sonoco’s industrial-related markets will keep witnessing bleak demand compared with the previous year due to the pandemic-induced shutdowns. The Paper and Industrial Converted Products segment will be impacted by a negative price/cost relationship during the current quarter due to higher year-over-year recycled fiber costs and lower market pricing. The Display and Packaging business will continue to face weak retail promotional display activity.

Price Performance

Shares of Sonoco have gained 5.7% over the past three months compared with the industry's growth of 10.1%.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector include Silgan Holdings, Inc. SLGN, IIVI Incorporated IIVI and SiteOne Landscape Supply, Inc. SITE. While Silgan and IIVI sport a Zacks Rank #1, SiteOne carries a Zacks Rank of 2, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Silgan has a projected earnings growth rate of 28.7% for 2020. The company’s shares have gained 14.7% so far this year.

IIVI has an estimated earnings growth rate of 29% for the ongoing year. The company’s shares have rallied 37% in the past year.

SiteOne Landscape has an expected earnings growth rate of 15.4% for the current year. The stock has appreciated 41% year to date.

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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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