Will Hurricane Florence & Tariffs Impair Sonoco's Results?
On Oct 5, we issued an updated research report on Sonoco Products Company SON. Notably, the company’s results will be hurt by elevated costs due to damages caused by Hurricane Florence, tariffs, higher material costs and strong U.S. dollar.
Let’s illustrate the factors in detail.
Hurricane Florence to Mar Sonoco’s Results
Last month, Sonoco temporarily shut down its paper-mill operations in Hartsville, SC, due to unprecedented flooding from Hurricane Florence. The hurricane significantly impacted the company’s manufacturing operations, comprising six uncoated recycled paperboard (URB) machines and one corrugated medium paper machine. The storm also interrupted operations at three of Sonoco’s Recycling locations in North Carolina, and tube and core operation in Hartsville.
Thus, Sonoco’s third-quarter 2018 results will bear the brunt of repair expenses at the Hartsville manufacturing complex and other affected locations due to damage caused by the flood. In addition, it expects to incur increased input, operational and supply-chain costs to recover from the disaster.
Tariffs & Inflation Remain Threats
Sonoco projects tariff costs — primarily for steel and aluminum, including foil laminates and labels — for second-half 2018 to be $7-$9 million. The company is also facing inflationary cost pressure from higher freight, wages, energy and elevated cost for materials, particularly resins. These factors remain headwinds for the company in third-quarter 2018.
Strong U.S. Dollar is a Concern
With a strong dollar, exports will continue to be impacted. Thus, the headwinds from a strengthening dollar will affect its industrial businesses, moving ahead.
Sonoco has outperformed the industry over the past year despite the above-mentioned headwinds, mainly due to its focus on Grow and Optimize strategy and acquisitions. Shares of the company have gained around 7% compared with 5% loss recorded by the industry during the same time frame.
Zacks Rank & Stocks to Consider
Sonoco currently carries a Zacks Rank #4 (Sell).
Better-ranked stocks in the same industry include Atkore International Group Inc. ATKR, Donaldson Company, Inc. DCI and Flowserve Corporation FLS. All three stocks sport a Zacks Rank #1 (Strong buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Atkore has a long-term earnings growth rate of 10%. The stock has gained around 25% in a year’s time.
Donaldson has a long-term earnings growth rate of 11.5%. The company’s shares have rallied around 25% over the past year.
Flowserve has a long-term earnings growth rate of 17.3%. Its shares have rallied 24% in the past year.
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