On Nov 27, 2014, we issued an updated research report on Sonoco Products Co. (SON), a global manufacturer of consumer and industrial packaging products.
In the third quarter, Sonoco reported record earnings of 72 cents per share, a 14% year-over-year increase, which outperformed the company’s guided range of 66 to 70 cents per share. Earnings in the quarter benefited from the settlement of a lawsuit, which added approximately 3 cents per share after tax, and a lower effective tax rate. Positive price/cost relationship, modest improvements in manufacturing productivity, lower pension expense, and higher volumes were partially offset by a negative mix of business along with higher labor, maintenance and other operating costs.
After having a difficult run following the recession, the Display and Packaging segment’s sales and profit improved in 2013 and the momentum has continued in 2014 as well, driven by volume increases in both international contract packaging and the U.S. display and packaging services. Furthermore, the annual $20 million contract from Energizer Holdings Inc. (ENR), awarded in April, has also supported results. The contract entails the primary packaging, retail display assembly and fulfillment of a segment of battery products for Energizer brands.
Sonoco’s pending acquisition of Weidenhammer Packaging Group is expected to strengthen its packaging business in Europe and further expand its expertise in stable, highly decorated convenience packaging. The acquisition, worth $383 million in cash, is expected to close in the fourth quarter of 2014 and will be accretive to Sonoco's 2015 base earnings in the range of 9 cents to 14 cents per share. It will increase Sonoco's consumer-related packaging and services business to around $2.8 billion in annual sales or around 53% of its combined revenue. In addition, the combination is expected to increase the company's net sales in Europe to roughly 21% of total sales.
Performance at Consumer Packaging, historically Sonoco’s largest and most profitable segment, has been weak as decline in composite can volume in North America continues to offset volume growth in other products and regions. This was due to lower consumer demand for packaged food in certain served segments and as many of Sonoco’s customers were focused on maintaining lower levels of inventory.
The segment’s operating profit has also been affected by negative mix of business and higher labor, maintenance and other operating costs, which more than offset productivity improvements and a positive price cost relationship. We do not expect any meaningful volume pick-up in the fourth quarter considering the sluggish consumer spending environment.
Sonoco projected fourth-quarter 2014 earnings per share in the range of 59 cents to 64 cents. Sonoco expects molded resin prices to fall in the fourth quarter, which when combined with the recent market price increases will witness improvement relative to price cost.
For fiscal 2014, Sonoco revised its earnings per share guidance in the range of $2.46 to $2.51 from $2.43 to $2.53. Sonoco does not expect any notable improvement in consumer demand for packaged food and remains cautious about the state of economy in Europe and some emerging markets.
Other Stocks to Consider
At present, Sonoco carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include MeadWestvaco Corporation (MWV) and Crown Holdings Inc. (CCK), both of which hold a Zacks Rank #2 (Buy).
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