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Here's Why You Should Hold On to Sonoco (SON) Stock Right Now

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Sonoco Products Company (SON - Free Report) is gaining from robust demand for the consumer packaging and industrial-related businesses. 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 B. 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.

Positive Earnings Surprise History

Sonoco has a trailing four-quarter average earnings surprise of 3.77%. 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 third-quarter 2021 adjusted earnings per share to lie between 87 cents and 93 cents compared with the earnings of 86 cents reported in third-quarter 2020. For 2021, management estimates adjusted earnings per share guidance at $3.50-$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 global vaccination efforts.

Valuation is Inexpensive

The trailing 12-month EV/EBITDA ratio is 6.1 for the company, while the industry's average trailing 12-month EV/EBITDA ratio is 22.6.

Positive Growth Projections

The Zacks Consensus Estimate for 2021 earnings is currently pegged at $3.56, indicating year-over-year growth of 4.4%. The same for 2022 is pinned at $3.84, suggesting a year-over-year improvement of 7.9%.

Growth Drivers in Place

Sonoco’s Consumer Packaging segment is gaining from the pandemic-driven demand for certain consumer products like food and household products. It expects volumes to remain above the pre-pandemic levels in this business despite more normalized demand for food packaging as consumers moderate at-home eating patterns. It anticipates the COVID-impacted markets, such as confectionery, food service and construction products to continue on the path to recovery. The company’s industrial-served markets will gain from the historically-high backlogs for uncoated recycled paperboard in the United States and Canada, and with demand for global tubes, cores and cones returning to the pre-pandemic levels.

Sonoco’s temperature-assured business will benefit from the rising sales of critical products packaging for pharmaceutical transport, including flu vaccines. Additionally, the company's plastics business which serves the healthcare industry will gain from improved demand for elective surgeries in third-quarter 2021.

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 fuel 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.

Meanwhile, the company expects raw material and non-material cost inflation, and impact of the COVID-19 pandemic on global supply chains to dent its performance in the third quarter. Also, higher recycled fiber, resin, as well as freight costs might erode the margin.

Price Performance

Shares of Sonoco have gained 10% so far this year, compared with the industry's growth of 10.5%.

Zacks Investment Research
Image Source: Zacks Investment Research

Stocks to Consider

Better-ranked stocks in the Industrial Products sector include Encore Wire Corporation (WIRE - Free Report) , Lindsay Corporation (LNN - Free Report) and Lincoln Electric Holdings, Inc. (LECO - Free Report) . All these companies sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Encore Wire has a projected earnings growth rate of 332.6% for fiscal 2021. So far this year, the company’s shares have gained 45%.

Lindsay has an estimated earnings growth rate of 17.3% for the ongoing year. The company’s shares have gained 35% so far this year.

Lincoln Electric has an expected earnings growth rate of 45.1% for 2021. The stock has appreciated 22% year to date.