Sonoco Products Co. (SON) at its investor day highlighted its growth expectations for 2012 and provided an insight into its strategic initiatives. The company has backed its earlier guidance meant for fiscal 2011.
Sonoco maintained its fourth quarter EPS in the range of 59 cents to 63 cents and full year EPS in the range of $2.41 to $2.45 as put forward during its third quarter earnings call. The company had then lowered its full year guidance from the earlier range of $2.46 to $2.54 given a more cautious outlook on global economic conditions and the direction of consumer spending. The Zacks Consensus Estimate currently stands at $2.43, at the midpoint of the company’s guided range.
For 2012, Sonoco envisions EPS to be in the range of $2.47 to $2.57. The mid point of $2.52 suggests a growth rate of 3.7% over the midpoint of $2.43 of the guided range for 2011. The guidance includes an estimated 20 cents per share improvement stemming from volume growth, productivity gains and a positive price/cost relationship, and 7 cents per share contribution from the recent acquisition of Tegrant Corporation. However, 16 cents per share in negative items, including an estimated 10 cents per share impact from higher pension expenses, have been factored into the guidance. The Zacks Consensus Estimate is $2.53, a cent above the midpoint of the company’s guided range.
On the sales front, Sonoco expects to reach a record level of $4.5 billion in 2011, marking the second consecutive year of double-digit sales growth, a feat that has not been witnessed by the company in the past fifteen years. For 2012, sales are expected to reach the $5 billion mark in 2012. The Zacks Consensus Estimates for 2011 and 2012 are at a respective $4.5 billion and $4.9 billion.
The company is expected to record cash flow from operations of around $410 million in 2012, including an estimated $60 million cash contribution for the company’s pension and postretirement plans. This is a substantial jump over the target of $260 million in cash from operations for 2011, which includes approximately $140 million in cash contributions to pension and postretirement plans.
Capital expenditures are planned at roughly $185 million for 2012, compared with an expected $155 million in 2011. The additional expenditure will be geared toward new growth projects as well as additional capital needs related to the recent addition of Tegrant’s operations. After dividend payments to shareholders, the company plans to utilize the cash flow to pare debt.
The company added that following the Tegrant acquisition, Sonoco has formed a new Protective Packaging segment which comprises four businesses – Protexic Brands, ThermoSafe Brands, Alloyd Brands and Sonoco’s existing custom-designed paperboard packaging business. The segment is touted to be a market leader in custom-engineered molded foam, temperature-assured and retail security packaging, generating sales of approximately $560 million in 2012.
The company intends to grow this business to approximately $1 billion in annual sales by leveraging existing relationships with its global customers, new product development and gaining access to emerging markets.
Our Take
The Tegrant acquisition is not only the largest to date in the company’s history, it has the potential to place the company as the leader in multimaterial protective packaging in North America. We believe Sonoco’s strategy to grow through acquisitions, potential restructurings and increased focus on emerging markets will certainly bring long-term benefits.
However, raw material inflation, pension expense headwinds, high customer concentration and a still fragile construction industry will affect its financial results in the near term. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.
Hartsville, South Carolina-based Sonoco is a global manufacturer of consumer and industrial packaging products. The company has more than 300 operations in 35 countries throughout North and South America, Europe, Australia and Asia.
The company operates through four reportable segments: Tubes and Cores/Paper, Consumer Packaging, Packaging Services and All Other Sonoco segment. Sonoco competes with Bemis Company Inc. (BMS) and Rock-Tenn Co. (RKT).
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