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Why Is Sonoco (SON) Down 4.9% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Sonoco (SON). Shares have lost about 4.9% 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 the most recent earnings report in order to get a better handle on the important drivers.

Sonoco Beats on Q1 Earnings, Withdraws '20 Guidance

Sonoco reported adjusted earnings of 94 cents in first-quarter 2020, which outpaced the Zacks Consensus Estimate of 84 cents by a margin of 12%. The figure also improved 11% from the prior-year quarter. The bottom line was also higher than management’s guidance of 83-89 cents. The improved performance was driven by productivity improvements and cost management.

On a reported basis, including one-time items, earnings per share came in at 80 cents compared with the year-ago quarter’s 73 cents.

Sonoco’s net sales came in at $1.30 billion missing the Zacks Consensus Estimate of $1.36 billion. The top line also declined 3.6% year over year due to lower volume/mix, reduced selling prices and a stronger U.S. dollar. However, increased sales from acquisitions somewhat offset these negatives.

Operational Update

Cost of sales came in at $1.04 billion compared with $1.08 billion in the year-earlier quarter. Gross profit during the reported quarter totaled $267 million, down from the year-ago quarter’s $270 million. Gross margin came in at 20.5% compared with 20.0% reported in the prior-year period.

Selling, general and administrative expenses totaled $124 million, down 13% year over year. This can primarily be attributed to the company’s focus on reducing controllable costs, which were partially offset by the addition of expenses from acquisitions. Adjusted operating income improved 13% year over year to $144 million during first-quarter 2020. Operating margin came in at 11.0% compared with the 9.5% in the year-ago quarter.

Segment Performance

The Consumer Packaging segment reported net sales of $588 million, down 0.2% from $590 million in the prior-year quarter. Operating profit climbed to $67.8 million from $62.1 million in the comparable period last year.

Net sales in the Paper and Industrial Converted Products segment came in at $475 million, indicating a year-over-year decline 4%. Operating profit totaled $54 million compared with the $48 million in the year-ago period.

The Display and Packaging segment’s net sales declined 12% year over year to $121 million. The segment reported an operating profit of $8.1 million compared with the $6.5 million reported in the year-earlier quarter.

The Protective Solution segment’s net sales came in at $119 million, down 7.7% year. Operating profit of the segment jumped 27% year over year to $14 million.

Financial Performance

Sonoco reported cash and cash equivalents of $123.3 million at the end of first-quarter 2020 compared with $145 million at the end of 2019. The company recorded cash flow from operating activities of around $88 million in first-quarter 2020 compared with the prior-year figure of $92 million. Free cash flow for the quarter was $13.7 million, compared with $9.5 million in the year-ago quarter. At the end of the first quarter, the company’s total debt-to-capital ratio was 48.3% compared with the 48.1% reported at the end of 2019.

Q2 Guidance Provided, 2020 Outlook Withdrawn

Sonoco has withdrawn guidance for earnings, cash flow from operations and free cash flow for 2020 citing the uncertainty regarding the severity and duration of the coronavirus pandemic and inability to ascertain impact on the company's served markets. Currently, the company cannot estimate the financial impact of the COVID-19 pandemic on its results in 2020.

However, the company has provided guidance for second-quarter 2020. Sonoco expects adjusted earnings per share between 73 cents and 83 cents compared with earnings of 95 cents per share reported in second-quarter 2019. The guidance reflects a negative price/cost relationship, as a result of higher recycled fiber costs, and a negative impact from the strong U.S. dollar.

Sonoco anticipates consumer-related businesses to continue performing well in the second quarter as food consumption trends will sustain on account of stay-at-home consumers. Approximately 80% of the Consumer Packaging segment’s sales come from food packaging where the company is witnessing increased orders.

Paperboard operations in North America is likely to be relatively steady as increased demand for board serving the tissue and towel market should help offset declines from some of the industrial converted products businesses. Tubes, cores and cones volume are expected to be lower. The ThermoSafe temperature-assured packaging business is likely to perform well as it is supplying coolers, critical for virus testing and pharmaceutical transport. However, the Protective Solutions segment is likely to be negatively impacted by lower demand in molded foam and consumer fiber businesses.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -18.82% due to these changes.

VGM Scores

At this time, Sonoco has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile 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

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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