We have issued an updated research report on Sonoco Products Co.SON on Jul 17, 2015. Increased debt, unfavorable foreign exchange, higher pension expense, ongoing investigation of prior-period results and changing market conditions will be headwinds for this global manufacturer of consumer and industrial packaging products.
Sonoco reported adjusted earnings of 66 cents in the second quarter of 2015, a penny short of the Zacks Consensus Estimate. The company is currently conducting a review of its financial results for a single contract packaging center in Mexico due to the discovery of overstatements to prior periods' earnings.
This packaging center is part of the Display and Packaging segment. The review will likely lead to changes to Sonoco's historical financial statements dating back to first-quarter 2012. Based on the results till date, the company currently expects adjustments resulting in a cumulative reduction to its pre-tax earnings of approximately $30 million for the three years ending Dec 31, 2014.
For 2015, Sonoco lowered its earnings per share guidance to the range of $2.48 to $2.58 from the prior range of $2.60 to $2.70. Headwinds for the year include unfavorable foreign exchange, higher pension expense due to very low discount rates and newly issued mortality tables as well as the above-mentioned pending Mexico issue.
In October, Sonoco acquired Weidenhammer Packaging Group to strengthen its packaging business in Europe and further expand its expertise in stable, highly decorated convenience packaging. The transaction is expected to be accretive to Sonoco's 2015 base earnings by 10 cents per share.
However, the acquisition will increase the company's exposure to Europe. Macroeconomic weakness in the region, unfavorable foreign currency translation and increase in debt levels from financing the acquisition will affect results.
Sonoco expects display volumes to be flat in 2015 due to the loss of a customer. The company estimates that Display and Packaging trade sales could decline in 2015 by as much as 10% due to a combination of volume, price and unfavorable foreign exchange rate translation. However, due to mix, the company expects relative impact on segment operating profits to be less than that on sales.
The Zacks Consensus Estimate for Sonoco moved south 4% to $2.53 for fiscal 2015 and 3% and to $2.81 for 2016.
At present, Sonoco carries a Zacks Rank #4 (Sell).
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