Balanced Risk Reward for Sonoco

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On Jun 6, 2014, we issued an updated research report on Sonoco Products Co. (SON), a global manufacturer of consumer and industrial packaging products.

Sonoco’s first-quarter 2014 adjusted earnings increased 4% to 52 cents per share and beat the Zacks Consensus Estimate by a penny. Earnings were within the company’s guided range of 50 cents to 54 cents. A positive price/cost relationship, modest productivity improvements and lower pension and interest expenses helped offset lost production and sales due to severe winter weather across the U.S. and Canada.

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 $130 million for 2014. Sonoco expects second-quarter 2014 earnings per share in the range of 63–67 cents. Compared with 59 cents earned in the prior-year quarter, this reflects annual growth of 7% to 14%.

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 quarter 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 opportunity for other similar contract wins going forward. Furthermore, the pickup in promotional activity at the customer level signals increased volume outlook for packaging goods.

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.

As of the quarter end, 4.6 million shares remain available for repurchase under its 5 million share repurchase authorization. Further dividend hikes and share repurchases will boost shareholder value, thus providing support to the stock.

The severe winter weather in January and February significantly disrupted Sonoco’s operations as well as its customers’. However, with the weather improving, the company noted a significant rebound in demand followed by a return to a more normal and expected level of sales orders in March. Although overall volume was essentially flat, second-quarter earnings benefited from a 50 basis point increase in the company's overall gross margin due to a positive price/cost relationship.

Over the next 3 to 4 years, Sonoco aspires to improve sales to between $5.5 and $6.0 billion, increase base earnings per share annually by approximately 10% and increase return on net assets employed to between 11% and 12%. We believe achieving these goals will be challenging in the current low-growth environment.

The Alloyd business, previously part of Sonoco’s Protective Solutions segment and now part of Display and Packaging, is continuing to perform below expectations. Alloyd was part of the $550 million Tegrant acquisition in late 2011. In 2013, Alloyd lost some businesses and incurred an operating loss of $4 million per year. Backed by some recent business wins, management expects breakeven results in 2014. However, returning to profitability will take time.

Management stated that 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 #3 (Hold). Some better-ranked stocks in the same industry include Graphic Packaging Holding Company (GPK) and Sealed Air Corporation (SEE), both with a Zacks Rank #2 (Buy).

Read the Full Research Report on SON
Read the Full Research Report on SEE
Read the Full Research Report on ENR
Read the Full Research Report on GPK


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