On Jun 27, 2016, we issued an updated research report on Sonoco Products Co. SON, a global manufacturer of consumer and industrial packaging products.
Sonoco cautions that second-quarter 2016 will be up against tough comparisons due to strong results in the year-ago quarter. Further, tough market conditions affecting its corrugating medium operation and a strong dollar will continue to hurt exports. For the second quarter, the company thus expects earnings per share in the range of 65–70 cents. The mid-point of the guidance reflects a year-over-year decline of 1%.
Estimates have been stable lately ahead of Sonoco’s Q2 earnings release. The Zacks Consensus Estimate is at 68 cents, within the company’s guidance. Given the earnings beat in last two quarters, the company has an overall positive earnings surprise in the last four quarters.
Despite the weak outlook for the second quarter and headwinds from a strong U.S. dollar and generally flat-to-weak economic conditions, Sonoco expects overall improved results in fiscal 2016. This is backed by record first-quarter 2016 results wherein each business segment reported solid year-over-year improvement. Sonoco thus reiterated its earnings per share guidance in the range of $2.64–$2.74. Compared to prior-year results, the guidance’s mid-point depicts a 7% rise.
Last quarter, a customer had decided against renewing a contract to continue operating a packaging center in Irapuato, Mexico. Sonoco is in the process of transitioning the operation to this customer. The loss of business will have a modest impact of about $50 million on second-half 2016 sales for the Display and Packaging segment. The slowdown in manufacturing in the U.S. and emerging markets, along with headwinds from a strong dollar, is expected to continue affecting its industrial businesses.
Meanwhile, Sonoco remains committed to its ‘Grow and Optimize’ strategy, which is focused on targeted growth of its Consumer Packaging and Protective Solutions businesses and optimization of its Industrial-focused businesses. The company will also launch several innovative products in 2016, as it continues to work closely with customers through its i6 Innovation Process, utilizing the full capability of the recently opened IPS Studio in Hartsville. According to the company, there are ample opportunities that would accelerate growth and optimize its customers’ operations in Europe.
Sonoco has capital growth projects in the pipeline through 2017 that will help expand its global production capability in composite cans, flexible packaging and rigid plastic containers. In consumer packaging, Sonoco will add more capacity to its new composite can plant in Kutno, Poland.
The introduction of a third line to this facility is in the pipeline for this year and Sonoco plans to add a fourth by mid 2017. The ramp-up of the Kuala Lumpur plant in Malaysia is also on track, delivering profits despite start-up costs. The company plans to add a new composite can line at its new plant in Shanghai, China, and follow it up with the development of a second plant in South China in the next two years.
Sonoco plans to develop a new rigid paper product technology engineered by its European rigid packaging operations for commercial development at its West Chicago, IL, can plant. In the flexible packaging business, Sonoco completed the installation and began operating a triplex laminator in its Morristown, TE plant. A new rotogravure press for its Waco, TX facility is also on schedule and will start trials this July. Further, in rigid plastics, to meet customer demand, Sonoco added new portion control and food tray capacity in its thermoforming operations and added capacity to its Beauty Park, OH blow-molding facility.
Sonoco has acquired a majority interest in Graffo Paranaense de Embalagens S/A (Graffo), a closely held flexible packaging business located in Brazil. Given Graffo's strong technical capabilities and established relationships with both large global consumer product companies and growing local companies, the company will be able to grow its business in Brazil, one of the important emerging markets.
Other Stocks to Consider
At present, Sonoco carries a Zacks Rank #3 (Hold). Some better stocks worth considering in the same industry include Berry Plastics Group, Inc. BERY, Greif, Inc. GEF and Silgan Holdings, Inc. SLGN. All of these stocks carry a Zacks Rank #2 (Buy).
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