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Strong End-Market Demand Aid Sonoco (SON) Amid Higher Costs

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Sonoco Products Company (SON - Free Report) is benefiting from a strong recovery in price and cost across most of its businesses and robust end-market demand. The Ball Metalpack acquisition, productivity initiatives and improved volume/mix are likely to aid the company’s margin. Focus on increasing investment in its core consumer and industrial businesses and pricing actions will drive growth. However, foreign currency translation, higher costs and non-recurring COVID-related incentives will dent results.

Segments Poised to Grow on Strong Demand

Sonoco’s consumer packaging business is primarily benefiting from the Metal Packaging acquisition. The segment’s flexible packaging business is gaining from strong demand for confectionery, food service and other food products. Plastic food packaging reflects higher demand in the fresh and prepared food markets.  Demand for Industrial Paper Packaging products has returned to pre-pandemic levels in most of the global markets. The company’s industrial-served markets will gain from strong demand for global tubes, cores and cones. Due to supply chain challenges, the company decided to delay the conversion of its Hartsville paper machine to the third quarter of 2022. This delay is expected to result in less downtime and will provide favorable results in the Industrial Paper Packaging segment in the second quarter of 2022.

SON’s ThermoSafe cold chain packaging business will benefit from strong demand for temperature-assured packaging, retail security packaging, industrial plastics, and molded foam components. Its plastics business, which serves the healthcare industry, will gain from improved demand for elective surgeries.

Investments to Drive growth

Sonoco is focused on increasing investment in its core consumer and industrial businesses and achieving an annual EBITDA of $1 billion by 2026. It plans to spend $325 million on capital projects in 2022 to drive growth and margin. The company will invest more than $11 million in a second paper can line in its latest operation in Brazil. This expansion will double the current capacity to produce stack chip cans while meeting growing customer demand.  Sonoco will spend around $25 million in the capital on the Metal Packaging business this year, including increasing two-piece production in Milwaukee and Chestnut Hill facilities. The company will invest $60 million over the next two years in its flexible packaging operations. Sonoco is focused on growing in niche food markets and launching new products with new customers.

Cost Control Actions to Support Margin

Sonoco is focused on driving profitable growth, margin expansion and generating solid free cash flow. Its balance sheet strength and availability of substantial liquidity in cash and revolving credit facilities will stoke growth.  The company is implementing aggressive price actions across its businesses to counter higher raw material and non-material inflation. SON’s focus on optimizing businesses through productivity improvement and standardization will also aid results in the near term. It is implementing several synergy opportunities, including optimizing raw material purchases, leveraging indirect expenses, and coordinating supply chain logistics. These factors will help meet Sonoco’s cost savings target of $20 million by 2024.

Upbeat Guidance

For 2022, the company expects adjusted EPS to be between $5.25 and $5.45. Sonoco had earlier provided adjusted EPS guidance of $4.60-$4.80 for the year. Robust demand, positive price/cost, productivity initiatives, improvement in volume/mix, benefit from lower interest expenses and reduced shares outstanding are likely to impact bottom-line results in 2022.

However, Sonoco will continue to bear the brunt of raw material, energy and freight cost pressures and the impact of the COVID-19 pandemic on global supply chains. Unfavorable impacts of foreign currency translation, non-recurring COVID-related incentives and increased SG&A expenses are likely to dent the company’s performance.

 

Zacks Rank and Other Stocks to Consider

Sonoco currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some other top-ranked stocks in the Industrial Products sector are Graphic Packaging Holding Company (GPK - Free Report) , Myers Industries (MYE - Free Report) and Packaging Corporation of America (PKG - Free Report) .  While GPK and MYE flaunt a Zacks Rank #1, PKG carries a Zacks Rank #2.

Graphic Packaging has an estimated earnings growth rate of 86.8% for the current year. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 7.6%.

Graphic Packaging pulled off a trailing four-quarter earnings surprise of 7.2%, on average. The company’s shares have appreciated 14.8% in a year.

Myers Industries has an expected earnings growth rate of 67% for 2022. The Zacks Consensus Estimate for the current year’s earnings has moved up 27% in the past 60 days.

MYE has a trailing four-quarter earnings surprise of 20.1%, on average. Myers Industries’ shares have gained 13% in the past year.

Packaging Corporation has an expected earnings growth rate of 16.2% for 2022. The Zacks Consensus Estimate for the current year’s earnings has moved up 4.2% in the past 60 days.

PKG has a trailing four-quarter earnings surprise of 19.6%, on average. Packaging Corporation’s shares have gained 4% in the past year.