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Sonoco's (SON) Q3 Earnings Beat, Revenues Miss Estimates

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Sonoco Products Company’s SON third-quarter 2018 adjusted earnings increased 13% year over year to 86 cents per share and came close to the higher end of management’s guided range of 82-88 cents. The reported figure also beat the Zacks Consensus Estimate of 82 cents.

On a reported basis, including one-time items, earnings per share came in at 72 cents, which remained flat compared to the prior-year quarter.

Sonoco’s net sales grew 3% year on year to $1.36 billion in the quarter. This year-over-year improvement was driven by acquisitions, volume growth and higher selling prices. However, the revenue figure missed the Zacks Consensus Estimate of $1.38 billion.

Sonoco Products Company Price, Consensus and EPS Surprise

 

Sonoco Products Company Price, Consensus and EPS Surprise | Sonoco Products Company Quote

Operational Update

Cost of sales came in at $1.1 billion, up 3% year over year. Gross profit during the third quarter totaled $260 million, marking a 3% improvement year over year. Gross margin contracted 10 basis points (bps) year over year to 19%.

Selling, general and administrative expenses totaled $136 million, up 5% year over year, chiefly resulting from acquisition-related costs, wage inflation and higher management incentive accruals. Sonoco’s adjusted operating income was $123.6 million in the quarter, which remained flat year over year. Operating margin shrunk 30 bps year over year to 9% in the Sep-end quarter.

Segment Performance

The Consumer Packaging segment reported net sales of $600 million, up 6% from $566 million recorded in the prior-year quarter, driven by acquisitions and higher selling prices, partially offset by the negative impact of foreign exchange and lower volume. Operating profit came in at $56 million, down 19% from the year-ago quarter.

Net sales in the Paper and Industrial Converted Products segment came in at $464 million, which declined 4% year over year, due to lower recovered paper prices, and a negative impact from changes in foreign exchange rates. Operating profit came in at $54 million, increasing 23% year over year.

The Display and Packaging segment’s net sales came in at $165 million, up 22% from $136 million reported in the year-earlier quarter, primarily backed by increased sales in the packaging center near Atlanta. The segment reported an operating profit of $3.7 million in the quarter under review compared with a gain of $2 million witnessed in the year-earlier quarter.

The Protective Solution segment’s net sales came in at $136 million, down marginally from $140 million reported in the prior-year quarter as the negative impact of declining foreign exchange rates and softer demand. Operating profit at the segment totaled $10 million, down 8% year over year.

Financial Performance

Sonoco reported cash and cash equivalents of $250 million at the end of third-quarter 2018, down from $255 million recorded at year-end 2017. The company reported cash flow from operating activities of $452 million for the nine-month period ended Sep 30, 2018, compared with $281 million recorded in the comparable period last year.

Long-term debt was $1.31 billion as of Sep 30, 2018, which increased from $1.29 billion as of Dec 31, 2017. As of Sep 30 2018, the company’s total debt-to-capital ratio was 43.1% compared with 45.6% as of Dec 31, 2017.

On Oct 1, 2018, Sonoco acquired the remaining 70% interest in the Conitex Sonoco joint venture and a composite can operation in Spain from Texpack, Inc., for approximately $143 million. Conitex Sonoco's results will be included in Sonoco’s Paper and Industrial Converted Products segment and the Spanish composite can operation in the Consumer Packaging segment.

Impact of Hurricane Florence

Sonoco's paper mill operations in Hartsville, SC, were temporarily shut down due to flooding caused by Hurricane Florence. The company has also temporarily closed operations at several of its recycling operations, tube and core plants, and other operations in Virginia, North Carolina and South Carolina due to the impact of the storm. All operations have now resumed production.

Lost production and sales at impacted facilities due to the hurricane negatively impacted third-quarter earnings by approximately 4 cents per share. It will also impact fourth-quarter 2018 earnings by around 2-3 cents per share due to additional lost production and higher supply chain costs.

Guidance

For full-year 2018, Sonoco updated its adjusted earnings per share guidance to $3.28-$3.34 from the earlier projection of $3.27-$3.37. Compared with the earnings of $2.79 per share in 2017, the mid-point of the guidance reflects year-over-year growth of 19%.

For fourth-quarter 2018, the company expects adjusted earnings per share to be 75-81 cents. Compared with the prior-year quarter’s earnings per share of 72 cents, the mid-point of the guidance reflects 8% year-over-year growth.

Share Price Performance

Over the past year, Sonoco has underperformed the industry it belongs to. The stock has gained around 3%, while the industry has recorded a loss of 15%.



Zacks Rank & Key Picks

Sonoco currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same sector include Atkore International Group Inc. ATKR, Tetra Tech, Inc. TTEK and Mobile Mini, Inc. MINI. While Atkore International and Tetra Tech sport a Zacks Rank #1 (Strong Buy), Mobile Mini carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Atkore International has a long-term earnings growth rate of 10%. The stock has gained 10% in a year’s time.

Tetra Tech has a long-term earnings growth rate of 14%. Its shares have rallied 33% in the past year.

Mobile Mini has a long-term earnings growth rate of 14%. The company’s shares have been up 23% over the past year.

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