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Sonoco Products Company’s (SON - Free Report) third-quarter 2017 adjusted earnings increased 5.6% year over year to 76 cents per share. Earnings also beat the Zacks Consensus Estimate of 74 cents and came near the higher end of management’s guidance range of 71-77 cents.
On a reported basis, including one-time items, earnings per share was 72 cents compared with 64 cents in the prior-year quarter.
Operational Update
Net sales of record $1.32 billion grew 9.6% year on year and also beat the Zacks Consensus Estimate of $1.27 billion. The improvement in sales was driven by higher selling prices, largely stemming from rising raw material prices, sales added from acquisitions and the positive impact of foreign exchange.
Sonoco Products Company Price, Consensus and EPS Surprise
Cost of sales came in at $1.07 billion, up 10.3% year on year. Gross profit during the quarter totaled $250.9 million, up 6.6% year over year. Gross margin contracted 60 basis points (bps) year over year to 18.9%, hurt by higher raw material and other operating costs.
Selling, general and administrative expenses were $130.3 million, up 7.2% year over year, chiefly due to acquisition-related costs and wage inflation. Sonoco’s adjusted operating income was $120.6 million in the quarter, up 6% from $113.8 million in the prior-year quarter. Operating margin contracted 40 bps year over year to 9% in the quarter.
Segment Performance
The Consumer Packaging segment reported net sales of $565.8 million, up 8.9% from $519.7 million in the prior-year quarter. Operating profit was $67.9 million, up 6.4% from the year-ago quarter.
Net sales at the Paper and Industrial Converted Products segment were $483.4 million, up 13.8% year over year. Operating profit was $42 million, a 26.8% year-over-year improvement.
The Display and Packaging segment’s net sales came in at $135.6 million, up 2.7% from $132 million in the year-earlier quarter. Operating profit was $1.97 million, a 61.9% plunge from the prior-year quarter.
The Protective Solution segment’s net sales came in at $139.9 million, up 5.7% year over year. Operating profit at the segment was $11.3 million, down 10.4% from the year-ago quarter.
Financial Performance
Sonoco recorded cash and cash equivalents of $247.9 million at the end of the third quarter, down from $257 million as of Dec 31, 2016. For the nine-month period ended Oct 1, 2017, the company’s cash flow from operations dropped to $282 million from $348.7 million in the prior-year comparable period. At third-quarter end, long-term debt was approximately $1.3 billion, up from $1.02 billion at the end of 2016.
At the end of the reported quarter, the company had a total debt-to-capital ratio of 44.8% compared with 40.4% at Dec 31, 2016. The increase in the debt and debt ratio are primarily due to the $230-million acquisition of Peninsula Packaging in March 2017 and the $170-million acquisition of Clear Lam Packaging in July 2017.
Guidance
For 2017, Sonoco raised its earnings per share guidance to the range of $2.75-$2.81 from the prior range of $2.73-$2.80. Compared with the earnings of $2.72 per share in 2016, the mid-point of the guidance reflects year-over-year growth of 2.2%.
For fourth-quarter 2017, the company projects earnings per share in the range of 68-74 cents. This guidance takes into consideration the impact of acquisitions, net of divestitures, and higher recovered paper prices during the fourth quarter. Compared with the prior-year quarter’s earnings per share of 62 cents, the mid-point of the guidance reflects year-over-year growth of 14.5%.
Sonoco remains aligned on implementing its Grow and Optimize strategy. The company remains focused on targeted acquisitions and development of new products, particularly focused on serving consumer demand for more fresh and healthy foods in the faster-growing perimeter of the store. It also sees opportunities to consolidate industrial-related markets and further optimize portfolio. Sonoco is trying to improve its operating structure to drive margin expansion.
Sonoco expects higher resin prices during the quarter which will likely be a headwind for the polymer-based packaging businesses. Thus, the company is implementing price hikes and projects contractual cost-recovery mechanisms to ultimately offset current cost increases.
On the other hand, recovered paper prices have dropped entering into the fourth quarter, which will likely help its paper-based businesses to recover from the previous raw material inflation. Also the recent storms’ impact remains a concern for the fourth-quarter performance as well. The storms could impact consumers’ buying habits. Sonoco remains cautiously optimistic regarding demand for its diverse mix of packaging products through the rest of the year.
In the last year, Sonoco has underperformed the industry it belongs to. The stock has gained around 2%, while the industry ascended 15.4%.
Zacks Rank & Key Picks
Sonoco currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the same space include Nine Dragons Paper (Holdings) Limited (NDGPY - Free Report) , Graphic Packaging Holding Company (GPK - Free Report) and Packaging Corporation of America (PKG - Free Report) . While Nine Dragons Paper sports a Zacks Rank of 1 (Strong Buy), Graphic Packaging and Packaging Corporation of America carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Nine Dragons Paper has an expected long-term earnings growth rate of 18%.
Graphic Packaging has an expected long-term earnings growth rate of 15%.
Packaging Corporation of America has an expected long-term earnings growth rate of 8.3%.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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Sonoco (SON) Q3 Earnings & Revenues Top, '17 EPS View Up
Sonoco Products Company’s (SON - Free Report) third-quarter 2017 adjusted earnings increased 5.6% year over year to 76 cents per share. Earnings also beat the Zacks Consensus Estimate of 74 cents and came near the higher end of management’s guidance range of 71-77 cents.
On a reported basis, including one-time items, earnings per share was 72 cents compared with 64 cents in the prior-year quarter.
Operational Update
Net sales of record $1.32 billion grew 9.6% year on year and also beat the Zacks Consensus Estimate of $1.27 billion. The improvement in sales was driven by higher selling prices, largely stemming from rising raw material prices, sales added from acquisitions and the positive impact of foreign exchange.
Sonoco Products Company Price, Consensus and EPS Surprise
Sonoco Products Company Price, Consensus and EPS Surprise | Sonoco Products Company Quote
Cost of sales came in at $1.07 billion, up 10.3% year on year. Gross profit during the quarter totaled $250.9 million, up 6.6% year over year. Gross margin contracted 60 basis points (bps) year over year to 18.9%, hurt by higher raw material and other operating costs.
Selling, general and administrative expenses were $130.3 million, up 7.2% year over year, chiefly due to acquisition-related costs and wage inflation. Sonoco’s adjusted operating income was $120.6 million in the quarter, up 6% from $113.8 million in the prior-year quarter. Operating margin contracted 40 bps year over year to 9% in the quarter.
Segment Performance
The Consumer Packaging segment reported net sales of $565.8 million, up 8.9% from $519.7 million in the prior-year quarter. Operating profit was $67.9 million, up 6.4% from the year-ago quarter.
Net sales at the Paper and Industrial Converted Products segment were $483.4 million, up 13.8% year over year. Operating profit was $42 million, a 26.8% year-over-year improvement.
The Display and Packaging segment’s net sales came in at $135.6 million, up 2.7% from $132 million in the year-earlier quarter. Operating profit was $1.97 million, a 61.9% plunge from the prior-year quarter.
The Protective Solution segment’s net sales came in at $139.9 million, up 5.7% year over year. Operating profit at the segment was $11.3 million, down 10.4% from the year-ago quarter.
Financial Performance
Sonoco recorded cash and cash equivalents of $247.9 million at the end of the third quarter, down from $257 million as of Dec 31, 2016. For the nine-month period ended Oct 1, 2017, the company’s cash flow from operations dropped to $282 million from $348.7 million in the prior-year comparable period. At third-quarter end, long-term debt was approximately $1.3 billion, up from $1.02 billion at the end of 2016.
At the end of the reported quarter, the company had a total debt-to-capital ratio of 44.8% compared with 40.4% at Dec 31, 2016. The increase in the debt and debt ratio are primarily due to the $230-million acquisition of Peninsula Packaging in March 2017 and the $170-million acquisition of Clear Lam Packaging in July 2017.
Guidance
For 2017, Sonoco raised its earnings per share guidance to the range of $2.75-$2.81 from the prior range of $2.73-$2.80. Compared with the earnings of $2.72 per share in 2016, the mid-point of the guidance reflects year-over-year growth of 2.2%.
For fourth-quarter 2017, the company projects earnings per share in the range of 68-74 cents. This guidance takes into consideration the impact of acquisitions, net of divestitures, and higher recovered paper prices during the fourth quarter. Compared with the prior-year quarter’s earnings per share of 62 cents, the mid-point of the guidance reflects year-over-year growth of 14.5%.
Sonoco remains aligned on implementing its Grow and Optimize strategy. The company remains focused on targeted acquisitions and development of new products, particularly focused on serving consumer demand for more fresh and healthy foods in the faster-growing perimeter of the store. It also sees opportunities to consolidate industrial-related markets and further optimize portfolio. Sonoco is trying to improve its operating structure to drive margin expansion.
Sonoco expects higher resin prices during the quarter which will likely be a headwind for the polymer-based packaging businesses. Thus, the company is implementing price hikes and projects contractual cost-recovery mechanisms to ultimately offset current cost increases.
On the other hand, recovered paper prices have dropped entering into the fourth quarter, which will likely help its paper-based businesses to recover from the previous raw material inflation. Also the recent storms’ impact remains a concern for the fourth-quarter performance as well. The storms could impact consumers’ buying habits. Sonoco remains cautiously optimistic regarding demand for its diverse mix of packaging products through the rest of the year.
In the last year, Sonoco has underperformed the industry it belongs to. The stock has gained around 2%, while the industry ascended 15.4%.
Zacks Rank & Key Picks
Sonoco currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the same space include Nine Dragons Paper (Holdings) Limited (NDGPY - Free Report) , Graphic Packaging Holding Company (GPK - Free Report) and Packaging Corporation of America (PKG - Free Report) . While Nine Dragons Paper sports a Zacks Rank of 1 (Strong Buy), Graphic Packaging and Packaging Corporation of America carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Nine Dragons Paper has an expected long-term earnings growth rate of 18%.
Graphic Packaging has an expected long-term earnings growth rate of 15%.
Packaging Corporation of America has an expected long-term earnings growth rate of 8.3%.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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