Sonoco Products Company SON remains well poised for growth on the back of its focus on pricing initiatives, Grow and Optimize strategy and acquisitions. However, higher material costs, impact of tariffs and strong U.S. dollar remain concerns.
The packaging company, with a market capitalization of approximately $5.5 billion, currently carries a Zacks Rank #3 (Hold).
Below, we briefly discuss the company’s potential growth drivers and possible headwinds.
Factors Favoring Sonoco
Investors should consider the positive trends on the estimate revision front. Analysts have been raising their estimates for Sonoco, of late, painting a bright earnings picture.
Over the past 30 days, the Zacks Consensus Estimate for the current year inched up around 1.5%. The company has an estimated long-term earnings growth rate of 4.7%.
Positive Earnings Surprise History
Sonoco surpassed the Zacks Consensus Estimate in three out of the last four quarters, with an average beat of 3.06%
The company has outperformed the industry it belongs to in the past year. The stock has gained 14%, while the industry recorded growth of 2%.
Higher Inventory Turnover Ratio
Over the trailing 12 months, the inventory turnover ratio for Sonoco has been 9.1% compared with the industry’s level of 6.4%. A higher inventory turnover than the industry average implies that inventory is sold at a faster rate, suggesting inventory management effectiveness.
Growth Drivers in Place
For full-year 2018, Sonoco raised its adjusted earnings per share guidance to $3.27-$3.37, which reflects year-over-year growth 19% at the mid-point. The company remains focused to drive inorganic growth through acquisitions. In May 2018, it signed a definitive agreement with Texpack, Inc., in a bid to acquire 70% interest in the Conitex-Sonoco joint venture, and Texpack's composite can operation in Spain. This buyout will create opportunities for Sonoco to further grow the Paper and Industrial Converted Products segment, especially in the fast growing Asian market. Further, Sonoco completed the acquisition of Highland Packaging Solutions in April. The company anticipates the acquisitions to drive its top-line performance.
Sonoco is on track to implement its Grow and Optimize strategy in 2018. The company remains focused on the development of new products and income prospects in the United States. It will continue to focus on optimizing its businesses through process improvement, standardization, cost control and commercial excellence. Its focus on thermoformed plastics, flexible packaging and consolidating industrial opportunities, particularly in the emerging markets, will also aid growth.
In addition, the company will gain from its pricing initiatives to combat inflation. It successfully hiked prices of tubes, cores and paper recently. This helped Sonoco achieve its sales growth and margin-improvement targets for the current year, with sales increasing 10.7% and base operating margin expanding 35 basis points in the first half of 2018 from the prior-year levels.
Headwinds for Sonoco
Sonoco expects earnings per share of 82-88 cents for third-quarter 2018. This outlook reflects a decline of 8.6% at the mid-point of the range from second-quarter 2018, mainly due to elevated material costs. The company projects tariff costs — primarily for steel and aluminum, including foil laminates and labels — for second-half 2018 at $7-$9 million. The company is also facing inflationary cost pressure from higher freight, wages, energy and escalating costs for materials, particularly resins. Furthermore, Sonoco’s exports will continue to be impacted by a strong dollar.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Stocks to Consider
Some better-ranked stocks in the same sector are W.W. Grainger, Inc. GWW, Actuant Corporation ATU and Atkore International Group Inc. ATKR. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Grainger has a long-term earnings growth rate of 12.5%. Its shares have appreciated 117%, over the past year.
Actuant has a long-term earnings growth rate of 15.6%. The company’s shares have gained 24% during the same time frame.
Atkore International has a long-term earnings growth rate of 10%. The stock has rallied 54% in a year’s time.
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