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Sonoco Rides on Cost Control, Buyouts Amid Coronavirus Fears

Zacks Equity Research

On Mar 31, we issued an updated research report on Sonoco Products Company SON. The company’s focus on optimizing businesses through process improvement, standardization and cost control will aid results. Strong balance sheet also allows the company to invest in growth and acquisitions. However, impact of the coronavirus outbreak and the recent slowdown in customer orders will weigh on Sonoco’s top line in the near term.

Upbeat 2020 Guidance Despite Coronavirus Impact

The company lowered earnings per share guidance for 2020 to $3.60-$3.70 from its previous guidance of $3.65-$3.75. This adjustment reflects the impact from the coronavirus outbreak in China to its company's operations and recent reductions in corrugated medium prices in the United States.

Weakening global economic conditions and the uncertainty regarding the impact of the outbreak are weighing on the sector’s customers. Consequently, customers have taken a conservative stance in managing their businesses by aggressively destocking inventory and holding back on new product launches. This slowdown in customer orders remains a major headwind.

Nevertheless, the mid-point of the guidance range reflects year-over-year growth of 3%. The bottom line is likely to be aided by benefits from recent acquisitions and its focus on optimizing businesses through process improvement, standardization and cost control. Growth in healthcare, convenience and demand for more sustainable packaging will continue to drive the company.

The Zacks Consensus Estimate for the company’s earnings for 2020 is currently pegged at $3.57, indicating year-over-year growth of 1.13%.

Acquisitions to Drive Growth

Sonoco plans to pursue accretive acquisitions in targeted consumer and industrial markets. Last October, the company acquired the remaining 70% interest in the Conitex-Sonoco joint venture and Texpack's composite can operation in Spain. The buyout of Conitex Sonoco will assist the company in expanding manufacturing presence in the Americas, Europe, and rapidly growing emerging markets in Asia.

The acquisition of Corenso Holdings North America in August 2019 strengthened Sonoco’s domestic paperboard operations. The company also penetrated the growing healthcare market with the addition of Thermoformed Engineered Quality LLC, and Plastique Holdings, LTD, (together TEQ) in January 2020. The fast-growing healthcare packaging space is a key area of growth.

Strong Financial Position to Fuel Growth

The company is focused on driving profitable growth, margin expansion and generating solid free cash flow. Its strong balance sheet enables the company to invest in capacity and pursue acquisitions.

For 2020, operating cash flow is projected at $625-$635 million. The company anticipates generating free cash flow between $250 million and $270 million. The mid-point of the free cash flow guidance range indicates growth of 9% over the adjusted 2019 cash flow of $239 million. Meanwhile, Sonoco remains focused on acquisitions in targeted consumer and industrial markets. The company plans to turn the consumer packaging segment around in fiscal 2020 and grow and optimize industrial packaging.

Share Price Performance

Sonoco, along with Amcor Plc AMCR, is part of the Containers - Paper and Packaging industry. The company’s shares have fallen 24.6% over the past year compared with the industry’s decline of 47.4%.

Zacks Rank & Stocks to Consider

Sonoco currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector include Sharps Compliance Corp SMED and Tetra Tech, Inc. TTEK. While Sharps Compliance Corp sports a Zacks Rank #1 (Strong Buy), Tetra Tech carries a Zacks Rank of 2 (Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Sharps Compliance has an estimated earnings growth rate of 767% for 2020. In a year’s time, the company’s shares have gained 36%.

Tetra Tech has an expected earnings growth rate of 10.7% for the ongoing year. In the past year, the company’s shares have appreciated 38%.

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