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Sonoco (SON) Q4 Earnings Miss Estimates, Revenues Down

Sonoco Products CompanySON reported fourth-quarter 2016 adjusted earnings of 62 cents per share, down 3.1% year over year. Earnings missed the Zacks Consensus Estimate of 63 cents; however came within management's guidance range of 60-65 cents.

On a reported basis, including one-time items, earnings per share surged 89% year over year to $1.04.

Operational Update

Net sales of $1.14 billion were down 10% year on year, falling short of the Zacks Consensus Estimate of $1.19 billion. The decline in sales came as a result of fewer selling days; lower volume in Consumer Packaging and Displays and Packaging segments; discontinuation of the company's packaging operations in Irapuato, Mexico; and the divestiture of blowmolding and other operations, net of acquisitions.

Sonoco Products Company Price, Consensus and EPS Surprise

Sonoco Products Company Price, Consensus and EPS Surprise | Sonoco Products Company Quote

Cost of sales was $927 million, down 9.8% year on year. Gross profit during the quarter totaled $214.8 million, down 10%. Gross profit declined in the fourth quarter due to fewer selling days in the quarter as against the comparable period in 2015; negative manufacturing productivity; higher labor, maintenance and other operating costs. Gross margin remained flat at 18.8% year over year.

Selling, general and administrative expenses were $123.6 million, down 10.6% year over year, chiefly due to lower pension and post-retirement benefit costs and fixed-cost reductions, as well as fewer selling days, which were partially offset by wage inflation. Sonoco's adjusted operating income was $91 million in the quarter, down 10% from $101 million in the prior-year quarter. Operating margin remained flat on a year-over-year basis at 8% in the quarter.

Segment Performance

The Consumer Packaging segment reported net sales of $485 million, down 11.8% from $550 million in 2015 due to the previously mentioned sale of the company's blowmolding operations, fewer selling days in the quarter, lower selling prices and the negative impact of foreign currency translation. Operating profit was $54.8 million, a 15.4% decline from the year-ago quarter, due to the blowmolding divestiture, fewer business days, unfavorable mix of sales, lower productivity, a negative price/cost relationship and higher labor, maintenance and other operating costs.

Net sales at the Paper and Industrial Converted Products segment were $412 million, down 4.3% year over year due to fewer selling days, the divestiture of a paperboard mill in France, and the negative impact of foreign currency translation. Operating profit was $25.7 million, a 2.6% year-over-year rise on the back of fixed-cost productivity improvements, and lower management incentives and pension expense.

The Display and Packaging segment's net sales came in at $113 million, down 27% from $156 million in the year-earlier quarter, mainly attributed to the previously announced loss of contract packaging business in Mexico and the negative impact of foreign currency translation. Operating profit was $1.3 million, slumping 63% from $3.6 million in the prior-year quarter, due to fewer selling days, discontinuation of packaging center operations in Mexico, along with higher labor, maintenance and other operating costs.

The Protective Solution segment's net sales came in at $131 million, up 0.8% year over year, driven by benefits from the acquisition of a UK-based temperature-assured packaging operation, and solid volume growth. Operating profit at the segment was $12.7 million, up 29.4% from $9.8 million in the year-ago quarter, driven by positive price/cost relationship, fixed-cost productivity improvements and lower management incentives.

Financial Performance

Sonoco reported cash and cash equivalents of $257 million at the end of 2016, up from $182 million as of Dec 31, 2015. In the quarter, Sonoco's cash flow from operations was $50 million, down from $145 million in the year-ago quarter. At 2016 end, total debt was approximately $1.05 billion, down from $1.13 billion at the end of 2015.

In 2016, Sonoco repurchased 2.03 million shares for $100 million at an average cost of $49.25 per share. These purchases were made under the company's previously announced plan to utilize up to $100 million to repurchase shares during 2016.

2016 Performance

Sonoco posted earnings of $2.72 per share for 2016, up 8.7% year over year. Earnings missed the Zacks Consensus Estimate $2.74. Revenues for full-year 2016 descended 3.7% year over year to $4.78 billion from $4.96 billion in 2015. Revenues fell short of the Zacks Consensus Estimate of $4.83 billion.

Guidance

For 2017, Sonoco revised its earnings per share guidance in the range of $2.66-$2.76, down 2 cents from the previous guidance, due to an updated estimate of pension expense.

For first-quarter 2017, the company expects earnings per share in the range of 55-63 cents. This guidance takes into consideration price/cost headwinds from rising raw material costs and the sale of the blowmolding operations.

The company guided operating cash flow in 2017 to be approximately $470 million and free cash flow to be roughly $125 million.

Share Price Performance

In the last one year, Sonoco has underperformed the Zacks classified Containers-Paper/Plastic sub-industry with respect to price performance. The stock gained around 31.1%, while the industry rose 32.8% over the same time frame.

Zacks Rank & Key Picks

Sonoco currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the same sector are Kennametal Inc. KMT , Altra Industrial Motion Corp. AIMC and Apogee Enterprises, Inc. APOG .

Kennametal has delivered an average positive earnings surprise of 9.90% in the last four quarters. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Altra Industrial Motion also boasts a Zacks Rank #1 and has delivered an average positive earnings surprise of 8.06% for the trailing four quarters. Apogee, another Zacks Rank #1 stock, has an average positive earnings surprise of 13.24% for the past four quarters.

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Sonoco Products Company (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 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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