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Sonoco Products Company SON has entered into an agreement to acquire Highland Packaging Solutions for approximately $150 million in cash. The deal will further strengthen its thermoforming business and increase presence in the fast-growing fresh perimeter of grocery stores.
Plant City, FL-based, privately owned Highland Packaging is a producer of thermoformed plastic packaging for fresh produce and dairy products. It has a global reach and generated net sales of approximately $90 million in 2017. The company from its world-class production facility in Plant City produces total packaging solutions for customers which includes sophisticated engineered containers, flexographic printed labels and inventory management through distribution warehouses in the Southeast and West Coast of the United States. Its products include clear, thermoformed hinged/lidded containers made from PET (Polyethylene terephthalate).
A Brief History of the Deal
The acquisition will be accretive to earnings in 2018. The purchase price represents an EBITDA multiple of approximately 6.5 times post-synergies and tax benefits from the write-up of intangibles. The deal, pursuant to normal regulatory review, is expected to close in the second quarter of 2018. On completion, Highland Packaging’s financial results will be reported within Sonoco’s Consumer Packaging segment and the business will be operated as part of Sonoco’s global plastics operations.
Multiple Benefits for Sonoco
The acquisition will expand Sonoco’s thermoforming capabilities and capacity. Highland Packaging caters to the fresh produce primarily strawberries, blueberries, blackberries, raspberries, tomatoes, grapes and eggs. Demand for thermoformed packaging used for berries, fresh-cut fruit and vegetables, salad, whole fruit and bakery/confectionary products is estimated to be around $1.3 billion.
Sonoco will foray into egg packaging through this deal. It is a growing market as egg is gaining importance as protein source in North America. In 2014, eggs consumption per person was at around 170 which is expected to grow up to more than 200 eggs in 2021. Notably, the global egg packaging market was valued at $4.2 billion in 2016 and is expected to reach $5.35 billion in 2021 — a CAGR of 4.96%.
The acquisition is also in sync with Sonoco’s Perimeter of the Store strategy, which capitalizes on the consumers’ growing demand for fresh and natural foods. Te perimeter of grocery stores, where fresh food is typically displayed is gaining consumer popularity. Fresh fruit and fresh vegetables dominate their respective categories outselling their shelf-stable and frozen center-store alternatives by a wide margin and also generate around 38% of store sales. Sonoco’s focus on this market is a wise move as perimeter store sales of fresh foods are anticipated to grow 15% in the 2012-2017 period.
Previous Acquisitions of Similar Space
In March 2017, Sonoco acquired another thermoformer Peninsula Packaging Company for $230 million. Peninsula Packaging manufactures thermoformed packaging for a wide range of whole fresh fruits, pre-cut fruits and produce, prepared salad mixes, as well as baked goods in retail supermarkets from five manufacturing facilities, including four in the United States and one in Mexico. This deal nearly doubled Sonoco’s thermoforming business. The company continues to make strategic acquisitions primarily aimed at its targeted growth areas of thermoforming, flexibles and protective packaging, along with select consolidating industrial opportunities primarily in emerging markets.
In the past year, Sonoco has underperformed the industry it belongs to. Sonoco has dipped 13% while the industry witnessed growth of 6%. In 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. Focused growth on packaging for fresh and natural products will subsequently provide a lift to its share price.
Zacks Rank & Other Key Picks
Sonoco currently carries a Zacks Rank #2 (Buy).
Some other top-ranked stocks in the same sector are AptarGroup, Inc. ATR, Berry Global Group, Inc. BERY and Packaging Corporation of America PKG. All three stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
AptarGroup has a long-term earnings growth rate of 8.5%. Its shares have gone up 15% over the past year.
Berry Global Group has a long-term earnings growth rate of 20%. The company’s shares have been up 11% during the past year.
Packaging Corporation of America has a long-term earnings growth rate of 8%. The stock has gained 25% in a year’s time.
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