Sonoco Products Company SON is poised to gain from its consumer packaging business, focus on productivity improvement and cost-control initiatives. A strong balance sheet also enables the company to invest in growth and acquisitions. However, higher material costs and the coronavirus outbreak’s impact on the company’s operations are concerns.
At present, Sonoco carries a Zacks Rank #3 (Hold). It has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities for investors.
The company has an estimated long-term earnings growth rate of 4.5%.
Sonoco Tops Q1 Earnings
Sonoco’s first-quarter 2020 adjusted earnings of 94 cents per share beat the Zacks Consensus Estimate of 84 cents and increased 11% year over year. This solid performance was aided by productivity improvements and cost management.
Positive Earnings Surprise History
Sonoco delivered a positive average earnings surprise history of 4.11% in the trailing four quarters.
The trailing 12-month EV/EBITDA ratio is 7.0 for the company, while the industry's average trailing 12-month EV/EBITDA ratio is pegged higher at 15.6.
Superior Return on Assets
Sonoco currently has a Return on Assets (ROA) of 7.3%, higher than the industry’s 4.7%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Growth Drivers in Place
Sonoco expects the Consumer Packaging segment to perform well in the second quarter approximately 80% of the segment’s sales come from food packaging where the company is witnessing increased orders. Further, paperboard operations in North America are likely to be relatively steady in the ongoing quarter as elevated demand for tissue and towel market will help offset declines from some industrial converted-product businesses.
Sonoco’s focus on optimizing businesses through productivity improvement, standardization and cost control will also aid results in the near term. Further, the company is focused on driving growth, margin expansion and generating solid free cash flow. Sonoco’s balance-sheet strength and availability of substantial liquidity in the form of cash and revolving credit facilities place it well to navigate through the current pandemic-induced crisis. In order to strengthen its cash flow and liquidity position, Sonoco is reducing planned capital expenditure for the current year, deferring pension-termination contributions to 2021 while also reducing operating costs. Sonoco also remains focused on acquisitions in targeted growth areas of flexible packaging and thermal formed rigid plastic containers, and development of new products.
Few Headwinds to Counter
Sonoco has withdrawn financial guidance for the current year citing the uncertainty regarding the severity and duration of the coronavirus pandemic and inability to ascertain impact on the company's served markets.
Furthermore, higher prices of Old Corrugated Containers (OCC) are likely to depress operating margins in the near term, while elevated recycled fiber prices will impact the company’s paper-based businesses during the current quarter until it achieves recovery of higher cost in the second half of the year.
Shares of Sonoco have lost 21.3% over the past three months compared with the industry's decline of 24.1%.
Stocks to Consider
Some better-ranked stocks in the Industrial Products sector are Silgan Holdings Inc. SLGN, Ampco-Pittsburgh Corporation AP and Energous Corporation WATT. While Silgan sports a Zacks Rank #1, Ampco-Pittsburgh and Energous carry a Zacks Rank #2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Silgan has a projected earnings growth rate of 11.3% for 2020. The company’s shares have gained 6% over the past three months.
Ampco-Pittsburgh has an expected earnings growth rate of 2.70% for the current year. The stock has appreciated 4% in the past three months.
Energous has an estimated earnings growth rate of 17.3% for the ongoing year. The company’s shares have rallied 17% in three months’ time.
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Silgan Holdings Inc. (SLGN) : Free Stock Analysis Report
Sonoco Products Company (SON) : Free Stock Analysis Report
AmpcoPittsburgh Corporation (AP) : Free Stock Analysis Report
Energous Corporation (WATT) : Free Stock Analysis Report
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