Sonoco Products (SON) to Bear the Brunt of Low Volumes - Analyst Blog

On Aug 13, 2014, we issued an updated research report on Sonoco Products Co. ( SON ), a global manufacturer of consumer and industrial packaging products.

Sonoco's second-quarter 2014 adjusted earnings increased 7% to 63 cents per share from the year-ago quarter but fell short of the Zacks Consensus Estimate of 64 cents. Earnings came in at the lower end of the company's guided range of 63 to 67 cents per share.

Benefits from improvements in manufacturing productivity, a favorable price/cost relationship, lower pension expense and acquisitions and strong performances in Paper and Industrial Converted Products as well as Display and Packaging segments resulted in the year-over-year growth in earnings. While factors like higher labor, maintenance and other operating costs and lower-than-expected results in Consumer Packaging and Protective Solutions segments caused it to reach just the lower end of the guidance range.

For full-year 2014, Sonoco reiterated its earnings per share guidance range of $2.43 to $2.53. Free cash flow is anticipated to be around $110 million for 2014. Sonoco expects second-quarter 2014 earnings per share in the range of 66 to 70 cents. The company expects that normal seasonality, average volume levels in the consumer business and improved productivity, particularly in flexibles will drive growth partly offset by a less favorable price cost relationship in the Paper and Industrial Converted Product segment

After having a difficult run following the recession, the Display and Packaging segment's sales and profit improved in 2013 and the momentum has continued in the first half of 2014 as well. This is driven by volume increases in both international contract packaging and the U.S. display and packaging services. Furthermore, the new contract from Energizer Holdings Inc. ( ENR ), awarded in April, has also supported results.

The annual $20 million Energizer contract entails the primary packaging, retail display assembly and fulfillment of a segment of battery products for Energizer brands. This contract is a major win for Sonoco, as it will leverage Sonoco's other segments in supplying e-packaging materials and will also provide packaging services. Sonoco foresees possibility of winning other similar contracts going forward. Furthermore, the pickup in promotional activity at the customer level signals increased volume outlook for packaging goods.

In April, Sonoco's board of directors marginally increased the quarterly dividend to 32 cents per share from the previous payout of 31 cents per share. The company has increased its dividend for 32 consecutive years. On an annual basis, Sonoco's new dividend payout is $1.28 per share, an increase of 3.2% and a yield of approximately 3%. Sonoco's dividend yield is one of the highest payouts provided by any U.S. packaging company and is about 50% higher than the yield of the S&P 500.

Sonoco's Protective Solutions segment has announced a 6% increase in prices on its Expanded Polystyrene molded foam products. Raw material manufacturers of Expanded Polystyrene materials continue to experience extremely high demand while supply has been reduced by a number of unplanned industry disruptions, resulting in additional increases in resin bead production. The price increase will help mitigate the margin pressure due to high input costs on the segment.

The Consumer Packaging segment (38% of total sales) reported flat sales as positive price mix and acquisitions were more than offset by negative foreign exchange rates and volumes. Composite can volume was down 5% in North America, which more than offset growth in can volume in Asia and Europe.

Operating profit declined 10% due to volume mix losses as well as higher labor and operating costs, which more than offset productivity improvements and a positive price cost relationship. Given that the segment has delivered positive volume growth only once in the previous nine quarters, we do not expect any meaningful volume pick-up in the latter half of the year considering the sluggish consumer spending environment.

While volume will remain affected for the balance of 2014, the company must manage energy and raw material costs as the price of certain resins have increased and old corrugated containers' (OCC) price may peak this summer.

Other Stocks to Consider

At present, Sonoco carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the same industry include Sealed Air Corp. ( SEE ) and Graphic Packaging Holding Co. ( GPK ). While Sealed air sports a Zacks Rank #1 (Strong Buy), Graphic Packaging holds a Zacks Rank #2 (Buy).

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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.

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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