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Why Hold Strategy is Apt for Sonoco (SON) Stock Right Now

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·4 min read
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Sonoco Products Company SON is gaining from robust demand from the consumer packaging business, focus on productivity improvement and cost-control initiatives. Moreover, a strong balance sheet helps the company invest in growth and acquisitions. However, high material costs and the pandemic’s unfavorable impact on the company’s operations are concerning.

Sonoco currently carries a Zacks Rank #3 (Hold). It has a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities.

The company has an estimated long-term earnings growth rate of 5%.

Positive Earnings Surprise History

Sonoco has a trailing four-quarter average earnings surprise of 4.84%.

Valuation is Inexpensive

The trailing 12-month EV/EBITDA ratio is 9.0 for the company, while the industry's average trailing 12-month EV/EBITDA ratio is 21.6.

Superior Return on Assets

Sonoco currently has a Return on Assets (ROA) of 6.3%, higher than the industry’s 5.1%. An above-average ROA denotes that the company is generating earnings by effectively managing its assets.

Growth Drivers in Place

Sonoco expects the Consumer Packaging segment to perform well in the current quarter as order levels for food packaging remain strong because customers are forced to stay at home amid the pandemic. Notably, 80% of the segment’s sales come from food packaging. Further, paperboard operations in North America are likely to be relatively steadier on elevated demand for the tissue and the towel market.

The Protective Solutions segment is likely to witness improved demand in the pharmaceutical and appliance served markets during the December-end quarter. The ThermoSafe temperature-assured packaging business is anticipated to gain from a strong flu vaccine season and solid demand from its base pharmaceutical and food customers during the ongoing quarter.

The company is also focused on driving growth, margin expansion and generating solid free cash flow. Sonoco’s balance-sheet strength and availability of substantial liquidity place it well to sail through the current crisis. It is also focused on acquisitions in the targeted growth areas of flexible packaging and thermoformed rigid plastic containers, along with the development of new products. Moreover, Sonoco’s focus on optimizing businesses through productivity improvement, standardization and cost control will aid its performance in the near term.

Few Headwinds to Counter

Sonoco expects adjusted earnings per share between 70 cents and 80 cents for the fourth quarter compared with the prior-year quarter’s 75 cents per share. Moreover, the company expects demand to shrink, indicating the normal year-end slowdown trend.

Furthermore, Sonoco’s industrial products related markets will continue to witness bleak demand compared with the previous year due to the pandemic-induced shutdowns. The Paper and Industrial Converted Products segment will be affected by a negative price/cost relationship during the ongoing quarter due to higher year-over-year recycled fiber costs and lower market pricing. The Display and Packaging business will continue to see weak retail promotional display activities.

Price Performance

Shares of Sonoco have gained 17.7% over the past three months compared with the industry's growth of 18.6%.


 

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector include AGCO Corporation AGCO, Avery Dennison Corporation AVY, and Ball Corporation BLL. While AGCO flaunts a Zacks Rank #1 (Strong Buy), Avery Dennison and Ball Corp carry a Zacks Rank of 2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO has an expected earnings growth rate of 15.5% for 2020. The stock has appreciated 42% in three months’ time.

Avery Dennison has an estimated earnings growth rate of 5% for the ongoing year. Shares of the company have gained 23.1% in the past three months.

Ball Corp has a projected earnings growth rate of 16.2% for the current year. Over the past three months, the company’s shares have gained 12.1%.

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