On Nov 20, we issued an updated research report on Sonoco Products Company SON. The company is poised to gain from pricing initiatives, focus on its Grow and Optimize strategy, acquisitions and a strong balance sheet position. However the company has to contend with elevated costs owing to damages caused Hurricane Florence, higher material and other costs, in the near term.
Let's analyze the factors in detail.
Pricing Initiatives to Aid Results
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. Further, the company will gain from pricing initiatives to counter inflation. It has recently announced price hikes in its Protective Solutions and Rigid Plastic Packaging business.
Acquisition to Drive Growth
Sonoco remains focused on driving inorganic growth through acquisitions. In October 2018, the company acquired the remaining 70% interest in the Conitex-Sonoco joint venture and Texpack's composite can operation in Spain, for approximately $143 million in cash. Conitex Sonoco is a vertically integrated global leader in the manufacturing of paper-based cones and tubes used in the textile industry. It will be included in Sonoco’s Paper and Industrial Converted Products Segment. The Spanish composite can operation will be included in its Consumer Packaging Segment.
The acquisition will assist the company in expanding manufacturing presence in the Americas, Europe, and rapidly growing emerging markets in Asia. It will also help build strong customer relationships by offering innovative packaging solutions in paperboard, textile carriers and other value-added products. The buyout will be modestly accretive to Sonoco’s earnings in 2018. The company earlier completed the buyout of Highland Packaging Solutions in April 2018 and bought Clear Lam July 2017. Both buyouts contributed to Sonoco’s Consumer Packaging segment’s top-line in the third quarter by $31 million. These acquisitions are likely to be accretive to the company’s top-line.
Grow and Optimize Strategy: A Key Catalyst
Sonoco is on track to implement its Grow and Optimize strategy in 2018. The company remains focused on targeted acquisitions, development of new products and income prospects in the United States. It will continue to focus on optimizing businesses through process improvement, standardization, cost control and commercial excellence. Its emphasis on thermoformed plastics, flexible packaging and consolidating industrial opportunities, particularly in the emerging markets, will also aid growth.
Impact of Hurricane Florence, Input Costs to Mar Near-Term Results
Sonoco's paper mill operations in Hartsville, SC, were temporarily shut down owing to flooding caused by Hurricane Florence. The company had 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 will impact fourth-quarter 2018 earnings by around 2-3 cents per share due to additional lost production and higher supply chain costs. Additionally, normal seasonal slowdown in the latter part of the quarter will impact earnings. 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 year-over-year growth of 8%.
For full-year 2018, Sonoco lowered adjusted earnings per share guidance to $3.28-$3.34 from the earlier projection of $3.27-$3.37. Impact of Hurricane Florence, impact of tariffs on steel, aluminum and other products will hurt results for the year. The company is also facing inflationary cost pressure from higher freight, wages, energy and elevated cost for materials, particularly resins.
Strong U.S. Dollar is a Concern
Exports will continue to be affected owing to a strong dollar. Consequently, the headwinds from a strengthening dollar will affect its industrial businesses, moving ahead.
Shares of Sonoco have gained around 10% over the past year, against the industry’s decline of 7%.
Zacks Rank & Stocks to Consider
Sonoco currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the same space include Enersys ENS, Mobile Mini, Inc. MINI and Cintas Corporation CTAS. While Enersys sports a Zacks Rank #1 (Strong Buy), Mobile Mini and Cintas carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Enersys has a long-term earnings growth rate of 10%. The stock has rallied 21% in a year’s time.
Mobile Mini has a long-term earnings growth rate of 14%. The company’s shares have gained 10% during the past year.
Cintas has a long-term earnings growth rate of 12%. Its shares have gained 21% over the past year.
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