On Mar 11, we issued an updated research report on Sonoco Products Company SON. The company is poised to gain from pricing initiatives, acquisitions, development of new products and strong free cash flow. However, inflationary cost pressure and elevated material costs, owing to the impact of tariffs, remain concerns.
Over the past year, Sonoco has outperformed the industry it belongs to. The stock has gained around 20.8%, while the industry registered a decline of 4.5%.
Sonoco reported adjusted earnings per share of 84 cents, up 16.7% year over year. Net sales grew 4.6% year over year to $1.36 billion in the quarter, driven by acquisitions and higher selling prices, partly offset by the negative impact of foreign exchange and lower volume in the Industrial Converted Products and Consumer Packaging and Paper segments.
Sonoco’s first-quarter 2019 outlook is pegged at 77-83 cents per share compared to 74 cents recorded in the year-ago quarter. The mid-point of the guided range reflects year-over-year growth of 11%.
For 2019, Sonoco maintained its adjusted earnings per share guidance to $3.47-$3.57. The mid-point of the guidance is at $3.52 a share, reflecting year-over-year growth of 9.6%. Earnings growth in the first quarter and full-year 2019 will likely be aided by a combination of positive price and cost relationship, higher volumes as well as benefit from the Conitex and Highland acquisitions.
Acquisitions to Drive Growth
Sonoco remains focused on driving inorganic growth through acquisitions. Last October, the company acquired the remaining 70% interest in the Conitex-Sonoco joint venture and Texpack's composite can operation in Spain, for approximately $145 million in cash. The acquisition will assist the company in expanding manufacturing presence in the Americas, Europe, and rapidly-growing emerging markets in Asia. The acquisition is expected to add around $260 million of annual sales to the company's Paper and Industrial Converted Products segment.
The company completed the buyout of Highland Packaging Solutions in April 2018 and bought Clear Lam July 2017. The Highland acquisition is expected to add around $110 million annual sales in the Consumer Packaging segment. These acquisitions are likely to provide impetus to the company’s earnings growth in the current year.
Strong Financial Position
The operating cash flow guidance for 2019 has been raised to $600-$620 million, from the earlier range of $590-$610 million. The company expects free cash flow for the year to range between $225 million and $245 million, 12% higher than the prior year. Further, Sonoco had a total debt-to-capital ratio of 43.9% as of Dec 31, 2018, compared with 45.6% as of Dec 31, 2017. This reflects the company’s strong balance-sheet position.
Grow and Optimize Strategy: A Key Catalyst
Sonoco 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 stoke growth.
Few Headwinds to Conquer
Impact of tariffs on steel, aluminum and other products will continue impacting Sonoco's results. The company is also facing inflationary cost pressure from higher freight, wages, energy and elevated cost for materials, particularly resins. However, the company believes it is well placed to gain from its pricing initiatives in order to combat inflation.
Over the past few years, Consumer Packaging volumes have been flat to down as consumers' preference for packaged food is clearly being impacted by changing taste for more fresh and natural products. Moreover, with a strong dollar, exports will continue to be impacted.
Sonoco Products Company Price and Consensus
Sonoco Products Company Price and Consensus | Sonoco Products Company Quote
Zacks Rank & Stocks to Consider
Sonoco currently carries a Zacks Rank #3 (Hold).
A few better-ranked stocks in the Industrial Products sector are Mueller Industries, Inc MLI, Lawson Products, Inc. LAWS and Albany International Corp. AIN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Mueller Industries has an expected earnings growth rate of 2.2% for 2019. The company’s shares have gained 16.7%, over the past year.
Lawson Products has an impressive projected earnings growth rate of 102.5% for the current year. The stock has appreciated 21.1% in a year’s time.
Albany International has an expected earnings growth rate of 44.7% for 2019. The company’s shares have gained 8.4%, in the past year.
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