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Sonoco to Divest Europe Contract Packaging Business for $120M

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Sonoco Products Company (SON - Free Report) recently entered into an agreement to divest its Europe contract packaging business to Prairie Industries Holdings for cash proceeds of $120 million. Based in Wisconsin, Prairie Industries is a contract packaging and contract manufacturing business focused on consumer goods and food products.

Sonoco’s Europe contract packaging business provides custom packaging and supply-chain management solution services to global consumer product companies through its six contract packaging facilities and a warehouse in Poland. The business, part of the company’s Display and Packaging segment, generated net sales of $300 million in 2019.

The management stated that the divesture supports Sonoco’s efforts to simplify its operating structure in order to focus on expanding the company’s core Consumer and Industrial packaging businesses. Net proceeds from the deal are likely to be utilized in reduction of short-term debt and boost Sonoco’s solid liquidity position. The transaction is expected to conclude in fourth-quarter 2020.

Sonoco is expected to have benefited from the Consumer Packaging business in the third quarter as sales from food packaging will keep benefiting from stay-at-home customers. Approximately 80% of the segment’s sales come in from food packaging, where the company is witnessing increased orders.

Moreover, Sonoco’s focus on optimizing businesses through productivity improvement, standardization and cost control will aid its performance in the near term. The company is focused on driving growth, margin expansion and generating solid free cash flow. It is also poised to gain from acquisitions in the targeted growth areas of flexible packaging and thermal formed rigid plastic containers, along with the development of new products.

However, the company expects its July-September quarter performance might have been hurt by the pandemic-induced challenging economic conditions, the negative impact of foreign-currency translation and higher interest expenses. The Zacks Consensus Estimate for third-quarter revenues is pinned at $1.30 billion, suggesting a decline of 3.7% from the prior-year period. The Zacks Consensus Estimate for earnings per share is pegged at 80 cents for the quarter, indicating a year-over-year fall of 17.5%.

Apart from this, Sonoco’s industrial-related markets will continue witnessing bleak demand compared with the previous year due to the pandemic-related shutdowns. The Paper and Industrial Converted Products segment might have been affected by a negative price/cost relationship during the September-end quarter due to higher year-over-year recycled fiber costs and lower market pricing. The Display and Packaging business will face weak retail promotional display activity even in the days ahead.

Price Performance

Shares of Sonoco have lost 6.9% over the past year, as against the industry's growth of 11%.

Zacks Rank & Stocks to Consider

Sonoco currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector include Graphic Packaging Holding Company (GPK - Free Report) , Lawson Products, Inc. (LAWS - Free Report) and Fortune Brands Home & Security, Inc. (FBHS - Free Report) , each carrying a Zacks Rank of 2 (Buy), currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Graphic Packaging has a projected earnings growth rate of 21.8% for the current year. Shares of the company have gained 2.1% over the past year.

Lawson Products has an estimated earnings growth rate of 3.4% for 2020. The company’s shares have gained 13.9% in a year’s time.

Fortune Brands has an expected earnings growth rate of 6.9% for the ongoing year. The stock has appreciated 55.6% in the past year.

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