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Why Hold Strategy is Apt for Sonoco (SON) Stock Right Now

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Sonoco Products Company (SON - Free Report) is gaining from forecast-topping first-quarter 2021 results and robust demand for the consumer packaging business. Moreover, a focus on productivity improvement and cost-control initiatives will drive growth. However, higher recycled fiber, freight and other operating costs might dent its margins.

Sonoco currently carries a Zacks Rank #3 (Hold). It has a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings & Sales Beat Consensus Mark in Q1

Sonoco reported adjusted earnings of 90 cents in first-quarter 2021, surpassing the Zacks Consensus Estimate of 85 cents. The figure also met the higher end of management’s guidance of 80-90 cents. Revenues of $1.35 billion also beat the Zacks Consensus Estimate of $1.32 billion.

Positive Earnings Surprise History

Sonoco has a trailing four-quarter average earnings surprise of 4.96%. The company has an estimated long-term earnings growth rate of 5%.

Upbeat Guidance

Sonoco anticipates demand in most of its consumer and industrial businesses to remain healthy in the near term. It projects second-quarter 2021 adjusted earnings per share to lie between 82 cents and 88 cents compared with the earnings of 79 cents reported in second-quarter 2020. For 2021, management raised its adjusted earnings per share guidance to $3.50-$3.60 from the prior range of $3.40 to $3.60. In 2020, the company reported adjusted earnings per share of $3.41. The upbeat guidance is based on the assumption that global business activity will continue to improve on the government stimulus measures and reopening of businesses.

Valuation is Inexpensive

The trailing 12-month EV/EBITDA ratio is 9.8 for the company, while the industry's average trailing 12-month EV/EBITDA ratio is 23.9.

Superior Return on Assets

Sonoco currently has a Return on Assets (ROA) of 6.2%, higher than the industry’s 5.3%. An above-average ROA denotes that the company is generating earnings by effectively managing its assets.

Positive Growth Projections

The Zacks Consensus Estimate for 2021 earnings is currently pegged at $3.57, indicating year-over-year growth of 4.69%. The same for 2022 is pinned at $3.83, suggesting a year-over-year improvement of 7%.

Growth Drivers in Place

Sonoco’s Consumer Packaging segment will continue to perform well in the current year as sales from food packaging keep benefiting from at-home eating habits amid the pandemic. Notably, 80% of the segment’s sales come in from food packaging. Moreover, demand in the Industrial Paper Packaging segment’s served markets continues to show sequential improvement. Paperboard operations in North America are gaining from elevated demand for the tissue and towel markets. Global demand for uncoated recycled paperboard remains strong and backlogs in North America are at the highest levels.

The Protective Solutions segment is likely to witness higher demand in the pharmaceutical and appliance-served markets during the upcoming quarter. The ThermoSafe temperature-assured packaging business is likely to gain from a strong flu vaccine season, and solid demand from its base pharmaceutical and food customers during the second quarter.

The company is focused on driving growth and margin expansion, and generating solid free cash flow. Sonoco’s balance-sheet strength and availability of substantial liquidity in the form of cash and revolving credit facilities will also stoke growth. Apart from this, Sonoco’s focus on optimizing businesses through productivity improvement, standardization and cost control will aid its performance in the upcoming period.

Few Headwinds to Counter

Sonoco expects the divestiture of display and packaging unit in United States to unfavorably impact its bottom line during the April-June quarter. The company expects higher Old Corrugated Containers (OCC) costs, surging recycled fiber, resins, chemicals adhesives, freight, and other operational costs to erode its margin in the ongoing quarter.

Price Performance

Shares of Sonoco have gained 47% over the past year compared with the industry's growth of 55.6%.


 

Stocks to Consider

Better-ranked stocks in the Industrial Products sector include AGCO Corporation (AGCO - Free Report) , Avery Dennison Corporation (AVY - Free Report) and Caterpillar Inc. (CAT - Free Report) . All of these stocks currently carry a Zacks Rank of 2.

AGCO Corporation has a projected earnings growth rate of 54.6% for the current year. Shares of the company have soared 217% over the past year.

Avery Dennison has an estimated earnings growth rate of 20.8% for 2021. The company’s shares have rallied 112% in a year’s time.

Caterpillar has an expected earnings growth rate of 45.6% for the ongoing year. Over the past year, the stock has appreciated 131%.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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