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Sonoco (SON) Beats on Q2 Earnings & Sales, Raises Guidance

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Sonoco (SON) Beats on Q2 Earnings & Sales, Raises Guidance

Sonoco's (SON) 2018 performance will benefit from lower tax rates despite rising expenses from tariffs, along with higher freight cost and other non-material inflation.

Sonoco Products Company SON reported stellar second-quarter 2018 results, wherein adjusted earnings increased 31% year over year to 93 cents per share and came above the higher end of management’s guided range of 83-89 cents. Earnings in the quarter benefited from growing diversified mix of global packaging businesses. The reported figure also beat the Zacks Consensus Estimate of 86 cents.

On a reported basis, including one-time items, earnings per share came in at 88 cents compared with 43 cents recorded in the prior-year quarter.

Sonoco’s net sales grew 10% year on year to $1.37 billion in the quarter. In addition, the figure surpassed the Zacks Consensus Estimate of $1.34 billion. This upswing was driven by acquisitions, volume growth, the positive foreign-exchange impact and higher selling prices.

Sonoco Products Company Price, Consensus and EPS Surprise

 

Sonoco Products Company Price, Consensus and EPS Surprise | Sonoco Products Company Quote

Operational Update

Cost of sales came in at $1.09 billion, up 8.7% year on year. Gross profit during the second quarter totaled $276.5 million, marking a 16% improvement year over year. Gross margin expanded 100 basis points (bps) year over year to 20.2%.

Selling, general and administrative expenses totaled $141 million, up 12.5% year over year, chiefly resulting from acquisition-related costs, wage inflation and higher management incentive accruals. Sonoco’s adjusted operating income summed $135.4 million in the quarter, up 19.7% from $113.1 million reported in the prior-year quarter. Operating margin advanced 90 bps year over year to 10% in the second quarter.  

Segment Performance

The Consumer Packaging segment reported net sales of $616 million, up 18% from $521 million recorded in the prior-year quarter, driven by acquisitions, positive translation impact of changes in foreign-exchange rates, and higher selling prices. Operating profit came in at $63.7 million, up 5.5% from the year-ago quarter.

Net sales in the Paper and Industrial Converted Products segment came in at $474 million, inching up 1.1% year over year, led by volume/mix growth and the positive impact of foreign exchange. Operating profit came in at $61.5 million, surging 35% year over year.

The Display and Packaging segment’s net sales came in at $143.3 million, up 24% from $115.6 million reported in the year-earlier quarter, primarily backed by volume growth related to a new pack center near Atlanta, and a positive foreign-exchange impact. The segment reported an operating loss of $0.6 million in the second quarter compared with a gain of $1.5 million in the year-earlier quarter.

The Protective Solution segment’s net sales came in at $132.9 million, down marginally from $134.6 million reported in the year-earlier quarter as the negative impact of declining foreign exchange rates offset higher selling prices. Operating profit at the segment totaled $13.6 million, up 23.7% year over year.

Financial Performance

Sonoco reported cash and cash equivalents of $197.7 million at the end of second-quarter 2018, down from $254.5 million recorded at year-end 2017. The company reported cash flow from operating activities of $251 million for the six-month period ended May 31, 2017, compared with $103 million witnessed in the prior-year period.

Long-term debt was $1.27 billion as of Jul 1, 2018, which declined from $1.29 billion recorded in the prior-year period. At the end of first-half 2018, the company had a total debt-to-capital ratio of 44.8% compared with 45.6% at Dec 31, 2017.

On May 29, 2018, Sonoco signed a definitive agreement with Texpack, Inc. in a bid to acquire its 70% interest in the Conitex-Sonoco joint venture and Texpack's composite can operation in Spain, for approximately $143 million in cash. This transaction is expected to close early in fourth-quarter 2018. Conitex Sonoco will be included in Sonoco’s Paper and Industrial Converted Products Segment and the Spanish composite can operation will be included in its Consumer Segment.

Guidance

For full-year 2018, Sonoco raised its adjusted earnings per share guidance to $3.27-$3.37 from the earlier projection of $3.22-$3.32. Compared with the earnings of $2.79 per share in 2017, the mid-point of the guidance reflects year-over-year growth of 19%.

For third-quarter 2018, the company projects adjusted earnings per share of 82-88 cents. Compared with the prior-year quarter’s earnings per share of 43 cents, the mid-point of the guidance reflects 100% year-over-year growth.

Share Price Performance

Over the past year, Sonoco has underperformed the industry it belongs to. The stock has gained around 7%, while the industry has recorded loss of 1%.



Zacks Rank & Key Picks

Sonoco currently carries a Zacks Rank #4 (Sell).

Better-ranked stocks in the same sector include Chart Industries, Inc. GTLS, Roper Technologies, Inc. ROP and Welbilt, Inc. WBT. While Chart Industries and Roper sport a Zacks Rank #1 (Strong Buy), Welbilt carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chart Industries has a long-term earnings growth rate of 26.9%. The stock has appreciated 119% in a year’s time.

Roper Technologies has a long-term earnings growth rate of 12.3%. Its shares have rallied 21% in the past year.

Welbilt has a long-term earnings growth rate of 10%. The company’s shares have been up 17% over the past year.

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