Sonoco (SON) Q3 Earnings Beat, Shares Down on Weak '20 View

Sonoco Products Company SON reported adjusted earnings of 86 cents in third-quarter 2020, down 11% year over year as gains from strong productivity, cost-reduction actions and contributions from recent acquisitions were offset by negative price/cost relationship, lower volume/mix, and higher tax and interest rates. This along with a tepid guidance for 2020 has led to a decline of 3.6% in Sonoco’s share price since its third-quarter earnings release. However, the bottom line outpaced the Zacks Consensus Estimate of 81 cents and management’s guidance of 73 cents-83 cents.

On a reported basis, including one-time items, earnings per share came in at 82 cents compared with the year-ago quarter’s 91 cents.

Sonoco’s net sales were $1.31 billion, which matched the Zacks Consensus Estimate. However, the top line declined 3% year over year on lower volume/mix, reduced selling prices and a stronger U.S. dollar. Nevertheless, higher sales from acquisitions somewhat offset these negatives.

Sonoco Products Company Price, Consensus and EPS Surprise

Sonoco Products Company Price, Consensus and EPS Surprise

Sonoco Products Company price-consensus-eps-surprise-chart | Sonoco Products Company Quote

Operational Update

Cost of sales were $1.06 million compared with the $1.09 million in the year-earlier quarter. Gross profit during the reported quarter totaled $257 million, down 3% year over year. Gross margin came in at 19.6%, flat compared with the prior-year period.

Selling, general and administrative expenses amounted to $126 million, up 5% year over year. Adjusted operating income declined 6% year over year to $131 million during the quarter under review. Operating margin came in at 9.9% compared with the year-ago quarter’s 10.3%.

Segment Performance

The Consumer Packaging segment’s net sales inched up 1% year over year to $584 million. Operating profit came in at $68 million, a 20% increase from the $57 million in the comparable period last year.

Net sales in the Paper and Industrial Converted Products segment totaled $459 million, reflecting a year-over-year decline of 7%. Operating profit totaled $34 million compared with $59 million reported in the year-ago period.

The Display and Packaging segment’s net sales declined 5% year over year to $138 million. The segment reported an operating profit of $11 million, which came in 21% higher than the year-earlier quarter.

The Protective Solution segment’s net sales amounted to $131.7 million, flat compared with the prior-year quarter. Operating profit of the segment improved 25% year over year to $18 million.

Financial Performance

Sonoco reported cash and cash equivalents of $783 million at the end of third-quarter 2020 compared with the $145 million at the end of fiscal 2019. The company recorded cash flow from operating activities of $489.5 million in the nine-month period ended Sep 30, 2020 compared with $238.8 million in the prior-year period. In the aforesaid period, free cash flow was $251.6 million compared with cash outflow $32 million in the prior-year period.
As of the third quarter’s end, total debt was $2.14 billion compared with $1.68 billion at the end of 2019. At the end of the reported quarter, Sonoco’s total debt to total capital was 53.2% compared with 48.1% at the end of 2019.

Other Updates

During the quarter, Sonoco acquired Habsheim, France-based Can Packaging, which is a privately-owned designer and manufacturer of sustainable paper packaging and related manufacturing equipment. The company paid approximately $49 million in cash for the buyout.

On Oct 9, 2020, Sonoco signed an agreement to sell its Europe contract packaging business, to Prairie Industries Holdings for $120 million in cash. The business was part of the Display and Packaging Segment. The transaction, subject to normal closing requirements, is expected to be completed in fourth-quarter 2020. The divestiture is in sync with the company’s efforts to simplify its operating structure and focus on growing its core Consumer and Industrial packaging businesses. Net proceeds from the transaction are expected to be used to reduce short-term debt and improve its liquidity position.

Q4 Guidance

Sonoco expects fourth-quarter adjusted earnings per share between 70 cents and 80 cents compared with earnings of 75 cents reported in fourth-quarter 2019. For 2020, the company projects adjusted earnings per share between $3.29 and $3.39. The mid-point of the range indicates a year-over-year decline of 5%. The company anticipates global macroeconomic conditions to remain stable compared with the second quarter. Further, the company anticipates demand to dip reflecting the normal year-end slowdown trend. Moreover, given the undertainty surrounding the pandemic, results might be impacted.

The company anticipates Consumer Packaging business to continue performing well in the fourth quarter as sales from food packaging will continue to gain from stay-at-home customers. Approximately 80% of the Consumer Packaging segment’s sales come from food packaging where the company is witnessing increased orders.

Nevertheless, industrial-related markets will continue to witness bleak demand. The Paper and Industrial Converted Products segment will be affected by a negative price/cost relationship during the fourth quarter due to year-over-year higher recycled fiber costs and lower market pricing, while stable Old Corrugated Cardboard (OCC) prices will remain stable. The Display and Packaging business will continue to face weak retail promotional display activity, which might be partly mitigated by cost-control actions.

Meanwhile, the Protective Solutions segment is likely to witness improved demand in the fourth quarter, particularly in the pharmaceutical and appliance served markets.

Price Performance

The company’s shares have lost 16.5% year to date against the industry’s growth of 1.2%.

Zacks Rank and Stocks to Consider

Currently, Sonoco carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are Crown Holdings, Inc. CCK, Pentair plc PNR and Worthington Industries, Inc. WOR. All of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Crown Holdings has a projected earnings growth rate of 11.7% for fiscal 2020. Year to date, the company’s shares have appreciated 22%.

Pentair has an estimated earnings growth rate of 2% for the ongoing year. The company’s shares have rallied 10% so far this year.

Worthington has an expected earnings growth rate of 19% for 2020. The stock has climbed 16% year to date.

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