On Dec 12, we issued an updated research report on Sonoco Products Company SON. The company will gain from acquisitions, development of new products and optimizing businesses through process improvement, standardization and cost control. Sonoco is also poised to gain from pricing initiatives and strong balance sheet position.
Poised for Improved 2018 & 2019
Sonoco raised fourth-quarter 2018 outlook to 79-85 cents per share compared with its previous guidance of 75-81 cents. Compared with earnings of 82 cents in fourth-quarter 2017, the mid-point of the new guidance range reflects year-over-year growth of 14%.
The 2018 earnings guidance was revised upward to $3.32 to $3.38, reflecting a projected increase of 20% from $3.35 per share earned in the prior year. The receipt of business interruption insurance proceeds associated with the impact of flooding on operations owing to Hurricane Florence in September led to the raised guidance for both the time periods. As a reminder, 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.
Despite hurricanes, inflation, impact of tariffs and weak consumer-served market demand, Sonoco anticipates delivering a record performance on all counts — sales, operating profit, earnings, operating cash flow and free cash flow in 2018. Sonoco’s strong diversified business mix and solid balance sheet is likely to drive results. 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.
For fiscal 2019, Sonoco estimates earnings per share at $3.47-$3.57. The mid-point of the guidance range is at $3.52 per share. Benefit from acquisitions, volume/mix growth and positive price/cost relationship driven by procurement productivity and commercial excellence initiatives will be somewhat offset by non-material inflation in excess of productivity, fixed-cost charges, higher income taxes and strengthening of the dollar against other currencies.
Acquisitions 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.
Shares of Sonoco have gained around 4% over the past year, against the industry’s decline of 15%.
Zacks Rank & Other Stocks to Consider
Sonoco currently carries a Zacks Rank #2 (Buy).
Some other top-ranked stocks in the same space include Enersys ENS, CECO Environmental Corp. CECE and Northwest Pipe Company NWPX, all three carrying the same rank as Sonoco. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Enersys has a long-term earnings growth rate of 10%. Its shares have rallied 18% in a year’s time.
CECO has a long-term earnings growth rate of 15%. The stock has surged 58% over the past year.
Northwest Pipe has a long-term earnings growth rate of 10%. The stock has gained 30% over the past year.
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