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Sonoco Maintained at Neutral

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On May 10, we maintained our Neutral recommendation on Sonoco Products Co. (SON), a global manufacturer of consumer and industrial packaging products based on its organic sales growth, geographic expansion and strategic acquisitions. It was offset by concerns regarding volatile raw material prices and uncertainty among its customers given the slow recovery in the U.S. and ongoing European weakness.

Why Reiterated?

Adjusted earnings per share for Sonoco Products declined 4% in the first quarter to 50 cents, while net sales dipped 3% to $1.179 billion. The year-over-year decline in sales was attributable to lower volume and selling prices in Consumer Packaging and Paper and Industrial Converted Products segments partially offset volume improvement and sales price gains in the Display and Packaging and Protective Solutions segments.

The company expects second quarter earnings per share between 56 and 60 cents, and guided full year earnings in the range of $2.26 to $2.32 per share.

The company expects to increase sales to $5.5 billion to $6 billion over the next three to four years, increase base earnings per share annually by approximately 10% and increase return on net assets employed to 12.5%. Growth drivers continue to be organic sales growth, new product sales, geographic expansion and strategic acquisitions.

Sonoco’s largest ever acquisition was of Tegrant, a leading provider of highly engineered, protective, temperature-assured and retail security packaging solutions in 2011. The company also made significant progress integrating Tegrant, successfully achieving targeted synergies and further expanding its new Protective Solutions segment. With the benefit of the Tegrant acquisition Sonoco was able to generate record sales and gross profits in 2012 and was able to significantly improve free cash flow.

Sonoco has announced price increases in its Industrial, Consumer Packaging and Protective Solutions businesses and expects it to offset higher operating and raw material costs. Sonoco has recently been awarded a contract from Energizer for the primary packaging, retail display assembly and fulfillment of a segment of battery products for Energizer brands. This should help packaging by roughly $20 million. The first shipment was delivered in March, with complete ramp up of operations expected to occur through the second quarter of 2013.

On the flipside, in the first quarter, the Consumer Packaging segment’s sales dipped 6.5% and operating profit declined 15% due to lower volume throughout the segment and lower sales prices, particularly in flexible packaging and plastics. The volume decline reflects softness in the European economy, negative churn, and market shrinkage in several packaging categories due to changes in customer preferences at both the retail and consumer levels.

Volatile raw material prices and uncertainty among its customers, given the slow recovery in the U.S. and ongoing European weakness remain headwinds for the company. Europe contributes 17% of Sonoco’s sales and given the scenario in Europe, we believe volume growth in the region will remain muted for some time.  Furthermore, in 2013, pension expense is expected to be higher compared to 2012.

Other Stocks to Consider

Other companies in the packaging and containers industry with favorable Zacks Ranks are Bemis Company, Inc. (BMS), Berry Plastics Group, Inc. (BERY) and Graphic Packaging Holding Co. (GPK) all of which carry a Zacks Rank #2 (Buy).

Read the Full Research Report on SON

Read the Full Research Report on BERY

Read the Full Research Report on BMS

Read the Full Research Report on GPK

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