Sonoco Products Company SON is poised to gain from its consumer packaging business, focus on productivity improvement and cost-control initiatives. A strong balance sheet also enables the company to invest in growth and acquisitions. However, high material costs and the pandemic’s unfavorable impact on the company’s operations are concerns.
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 for investors.
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 4.94%
Valuation is Inexpensive
The trailing 12-month EV/EBITDA ratio is 7.3 for the company, while the industry's average trailing 12-month EV/EBITDA ratio is 18.7.
Superior Return on Assets
Sonoco currently has a Return on Assets (ROA) of 6.7%, higher than the industry’s 4.9%. 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 sales from food packaging will keep benefiting from stay-at-home customers. Approximately 80% of the segment’s sales come from food packaging where the company is witnessing increased orders. Further, paperboard operations in North America are likely to be relatively steadier as elevated demand for the tissue and the towel market will help offset declines from some industrial converted-product businesses.
Further, the Protective Solutions segment, which serves the automotive and appliance markets, is likely to witness improved demand in the September-end quarter, as these markets are gradually recovering. The ThermoSafe temperature-assured packaging business is likely to gain from a strong flu vaccine season, and improved demand from its base pharmaceutical and food customers during the ongoing quarter.
Sonoco’s focus on optimizing businesses through productivity improvement, standardization and cost control will also aid its performance in the near term. In addition, stable Old Corrugated Containers (OCC) price is likely to offset negative impacts of price/cost, and improving operating margins in the current quarter.
The company is 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 thermal formed rigid plastic containers, along with the development of new products.
Few Headwinds to Counter
The company expects the current quarter’s adjusted earnings per share between 73 cents and 83 cents compared with earnings of 97 cents per share reported in the prior-year quarter. The guidance reflects challenging economic conditions resulting from the pandemic. Moreover, the negative impact of foreign-currency translation and higher interest expenses will hurt the bottom line during the July-September quarter.
Furthermore, Sonoco’s industrial-related markets will keep witnessing 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 current quarter due to higher year-over-year recycled fiber costs and lower market pricing. The Display and Packaging business will continue to face weak retail promotional display activity.
Shares of Sonoco have lost 15.8% over the past six months compared with the industry's growth of 0.8%.
Stocks to Consider
Some better-ranked stocks in the Industrial Products sector include Astec Industries, Inc. ASTE, Berry Global Group, Inc. BERY and SiteOne Landscape Supply, Inc. SITE. While Astec and Berry sport a Zacks Rank #1, SiteOne carries a Zacks Rank of 2, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.
Astec has an estimated earnings growth rate of 13.5% for the ongoing year. The company’s shares have rallied 68.5% in a year’s time.
Berry has a projected earnings growth rate of 32.3% for fiscal 2020. The company’s shares have appreciated 21.8% over the past year.
SiteOne Landscape has an expected earnings growth rate of 15.4% for the current year. The stock has surged 61.6% in the past year.
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