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Here's Why You Should Hold Sonoco Stock in Your Portfolio

Zacks Equity Research

Sonoco Products Company SON is poised to gain from pricing initiatives, focus on Grow and Optimize strategy, and strong balance sheet. However, higher material costs owing to the impact of tariffs remains a headwind.

 

Below, we briefly discuss the company’s potential growth drivers and possible challenges.

 

Factors Favoring Sonoco

 

Favorable Zacks Rank

 

Sonoco carries a Zacks Rank #3 (Hold). It has a VGM score of B. Here V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1, 2 or 3 make solid investment choices.

 

Price Performance

 

 

Shares of Sonoco have dipped around 4% over the past year compared with the industry’s decline of 16%.

 

Positive Earnings Surprise History

 

Sonoco outpaced the Zacks Consensus Estimate in three of the trailing four quarters, recording average beat of 3.61%.

 

Cheaper Valuation

 

The trailing 12-month EV/EBITDA ratio is 8.3 for the company while the industry’s average trailing 12-month EV/EBITDA ratio is pegged higher at 9.3. This implies that the stock is cheaper.

 

Return on Assets

 

Sonoco currently has a Return on Assets (ROA) of 7% while the industry recorded ROA of 5%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.

 

Upbeat 2018 Guidance

 

Sonoco’s fourth-quarter 2018 guidance is at 79-85 cents per share. The 2018 earnings guidance is at $3.32 to $3.38, reflecting a projected increase of 20% from $3.35 per share earned in the prior year. For fiscal 2019, Sonoco estimates earnings per share at $3.47-$3.57. The mid-point of the guidance range is at $3.52 per share.

 

The company remains optimistic about general economic activity. Sonoco believes the breadth of its diversified consumer, and industrial and protective operations across a number of markets are likely to drive consistent earnings and improve returns.

 

Growth Drivers in Place

 

Sonoco is on track to implement its Grow and Optimize strategy in 2018. The company steadily focuses on targeted acquisitions, development of products and income prospects in the United States. It will continue optimize businesses through process improvement, standardization, cost control and commercial excellence.

 

Acquisitions also remain a key catalyst. In October 2018, the company acquired the remaining 70% interest in the Conitex-Sonoco joint venture. The acquisition will assist the company in expanding its manufacturing presence in the Americas, Europe and the rapidly-growing emerging markets in Asia.

 

Further, the company bought Highland Packaging Solutions in April 2018 and Clear Lam in July 2017. Both acquisitions contributed $31 million to revenues at Sonoco’s Consumer Packaging segment during the third quarter of the current year. Moreover, these transactions are likely to be accretive to the company’s top line.

 

The company has an estimated long-term earnings growth rate of 4.7%.

 

Headwinds to Conquer

 

Impact of tariffs on steel, aluminum and other products will continue to hurt Sonoco's results. The company is also facing inflationary cost pressure from higher freight, wages, energy and elevated cost for materials, particularly resins. We believe the company will gain from its pricing initiatives to combat inflation. It has recently announced price hikes in its Protective Solutions and Rigid Plastic Packaging business.

 

Over the past few years, Consumer Packaging volumes have been flat to down as consumers' preference for packaged food is clearly being impacted by changing taste for more fresh and natural products.

 

Bottom Line

 

Investors are likely to retain the stock at present as it has ample prospects for outperforming its peers in the near future.

 

Stocks to Consider

 

A few better-ranked stocks in the same sector are Brady Corporation BRC, Lindsay Corporation LNN and Heritage-Crystal Clean, Inc. HCCI. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

Brady has a long-term earnings growth rate of 7.5%. The company’s shares have gained 11% over the past year.

 

Lindsay has an estimated long-term growth rate of 18%. Its shares have gained 3% in a year’s time.

 

Heritage-Crystal Clean has a projected long-term growth rate of 15%. Its shares have gained 5% over the past year.

 

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