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Sonoco to Gain in 2020 on Buyouts, Productivity Initiatives

Zacks Equity Research

Sonoco Products Co. SON provided financial outlook for 2020 and reaffirmed the same for 2019. The company plans to focus on acquisitions, portfolio optimization initiatives, new products and margin expansion through operating excellence and SG&A cost control.

2019 Guidance Maintained

Sonoco reaffirmed fourth-quarter 2019 and full-year earnings per share (EPS) guidance ranges, which were provided during the third-quarter earnings release. For the fourth quarter, EPS is envisioned between 72 and 76 cents. Compared with earnings of 84 cents in the year-ago quarter, the mid-point of the guidance range reflects a year-over-year decline of 12%.

The 2019 earnings guidance remains in the range of $3.50 to $3.54, the mid-point of which reflects a projected increase of 4% from $3.37 per share reported in 2018. The company’s projected sales for 2019 is at around $5.4 billion.

Updates on Cash Flow Forecast

Sonoco reaffirmed guidance for 2019 operating cash flow at $435-$455 million and free cash flow at $60-$80 million. This included the estimated after-tax impact from the company’s $200 million voluntary contribution to its U.S. defined benefit pension plan. The free cash flow guidance also takes into account expected cash dividend payments to shareholders of around $170 million.

Projects Record 2020 Earnings Performance

For 2020, Sonoco anticipates earnings per share to lie within $3.65 and $3.75. The mid-point of the target range is at $3.70 per share. If achieved it would be a record for the company.

The EPS guidance factors in positive impact from acquisitions (10 cents), volume/mix (15 cents), and productivity initiatives (43 cents per share). However these benefits are likely to be partially offset by an expected 33 cents per share negative price/cost relationship primarily from higher operating inflation and 9 cents per share impact from higher depreciation and amortization and other costs.

Moreover, higher income taxes and the impact of a strengthening dollar are expected to have a negative impact of 8 cents per share. Interest expense is projected to be flat as higher debt levels are likely to be mitigated lower interest rate

Sonoco projects sales for 2020 at $5.55 billion, an estimated year-over-year growth of 3%. This includes a positive impact of 143 million from acquisitions and $75 million for volume/mix. Lower sales price and unfavorable foreign currency impact are estimated at $46 million and $10 million respectively. Sonoco expects to deliver 4% organic growth in Flexible packaging and 4-5% organic growth in Rigid Plastic Packaging in 2020.

For 2020, operating cash flow is projected at around $635 million. The company expects to generate free cash flow of $260 million after spending $195 million in capital investments and a dividend payout of $180 million, subject to approval of its board. Excluding the estimated after-tax impact of a $200 million voluntary contribution to the company’s U.S. defined benefit pension plan in 2019, the increase in 2020 operating cash flow and free cash flow are likely to exhibit year-over-year growth of 4.1% and 10.6%, respectively. Sonoco plans to pursue accretive acquisitions in targeted consumer and industrial markets.

The cash flow outlook however excludes a potential pre-tax contribution of between $125 million and $175 million related to terminating and annuitizing the company’s U.S. pension plan, which should occur in late 2020 or early 2021. Further, Sonoco anticipates a non-cash settlement charge of between $550 million to $600 million at certain points in the pension termination process.

The company plans to turn the consumer packaging segment around in fiscal 2020 and grow and optimize industrial packaging. The company will continue portfolio optimization initiatives. It plans to focus on profitable growth through new products, customers and sustainable products. Margin expansion is expected to be aided by commercial excellence, operating excellence and SG&A cost control. Working capital management and strategic capital expenditure are likely to drive free cash flow.

Shares of Sonoco have gained 10.7% over the past year, against the industry's decline of 21.2%.

Zacks Rank & Stocks to Consider

Sonoco carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Sharps Compliance Corp SMED. All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 53% over the past year.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 41% over the past year.

Sharps Compliance has an estimated earnings growth rate of 500% for the ongoing year. In a year’s time, the company’s shares have gained 38%.

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