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Sonoco (SON) Down 1.8% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
PerkinElmer (PKI) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

A month has gone by since the last earnings report for Sonoco (SON). Shares have lost about 1.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sonoco due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Sonoco Earnings Beat & Sales Miss Estimates in Q4

Sonoco fourth-quarter 2018 adjusted earnings increased 16.7% year over year to 84 cents per share and were close to the high end of management’s guided range of 79-85 cents. The reported figure beat the Zacks Consensus Estimate of 81 cents.

On a reported basis, including one-time items, earnings per share came in at 77 cents compared with 6 cents in the year-ago quarter.

Sonoco’s net sales grew 4.6% year over year to $1.36 billion in the quarter. This improvement was 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. However, the sales figure missed the Zacks Consensus Estimate of $1.37 billion.

Operational Update

Cost of sales came in at $1.1 billion, up 4.7% year over year. Gross profit during the fourth quarter totaled $254 million, marking a 4% improvement year over year. Gross margin came in at 18.7% compared with 18.8% in the prior-year quarter.

Selling, general and administrative expenses totaled $148.8 million, up 16% year over year, primarily resulting from acquisition-related costs and wage inflation. Adjusted operating income was $116 million in the fourth quarter, down 1.4% year over year. Operating margin came in at 8.6% compared with 9% in the year-ago quarter.

Segment Performance

The Consumer Packaging segment reported net sales of $574 million, up 3.6% from $554 million recorded in the prior-year quarter. Operating profit came in at $43.7 million, down 34.7% from the year-ago quarter.

Net sales at the Paper and Industrial Converted Products segment came in at $512.4 million, reflecting an increase of 8.8% year over year on the Conitex acquisition and higher selling prices, partly offset by foreign exchange and lower volume. Operating profit totaled $55.9 million, up 22.6% year over year.

The Display and Packaging segment’s net sales came in at $141.2 million, relatively flat with the year-ago quarter’s $142.4 million owing to volume growth and higher selling prices, partly offset by reduced sales from exiting the Atlanta packaging center contract. The segment reported operating profit of $8.4 million in the fourth quarter against a loss of $4.1 million in the year-earlier quarter.

The Protective Solution segment’s net sales came in at $128 million, down 2.4% year over year primarily due to negative foreign exchange impact. Operating profit at the segment totaled $8.2 million, down 10.2% year over year.

Financial Performance

Sonoco reported cash and cash equivalents of $120 million at the end of fourth-quarter 2018, down from $255 million recorded at end-2017. The company reported cash flow from operating activities of $589.9 million in 2018, compared with $348.3 million last year.

Long-term debt was $1.19 billion as of Dec 31, 2018, down from $1.29 billion as of Dec 31, 2017. As of Dec 31 2018, the company’s total debt-to-capital ratio was 43.9% compared with 45.6% as of Dec 31, 2017.

On Oct 1, 2018, Sonoco acquired the remaining 70% interest in the Conitex Sonoco joint venture and a composite can operation in Spain from Texpack, Inc., for approximately $145 million. Also, Sonoco acquired an additional 19% interest in its Sonoco Asia, LLC, joint venture from PFE Hong Kong Limited for $35 million. Conitex Sonoco's results will be included in Sonoco’s Paper and Industrial Converted Products segment and the Spanish composite can operation in the Consumer Packaging segment.

2018 Results

Sonoco reported adjusted earnings per share of $3.37 in 2018, up 21% from $2.79 in the prior year. Earnings beat the Zacks Consensus Estimate of $3.34. On a reported basis, including one-time items, earnings per share came in at $3.10 compared with $1.74 in the year-ago quarter.

Sales increased 7% year over year to $5.39 billion. The top line missed the Zacks Consensus Estimate of $5.41 billion.

Guidance

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. Operating cash flow is expected in the range of $600-$620 million and free cash flow is anticipated between $225 million and $245 million.

For first-quarter 2019, the company expects adjusted earnings per share of 77-83 cents compared with the year-ago quarter’s 74 cents.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Sonoco has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Sonoco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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