Favorable supply/demand trends and an improving industry structure are expected to provide the much-needed impetus for the packaging industry’s growth. Rising demand in packaging for food & beverages, personal and household care products, medicines and other products also bode well for the industry.
The packaging companies are now, particularly, focused on geographic expansion through mergers and acquisitions. Aggressive restructuring and consolidation as well as focus on realigning product offerings to reduce operational costs spell good. Moreover, the preference for value-added services and customized packaging solutions to provide convenience, safety, durability, as well as freshness protection will continue to drive the industry.
Currently, the Zacks categorized Containers – Paper and Packaging sub industry is enjoying a Zacks Industry Rank of 113. The favorable rank places the industry in the top 44% of the 250+ groups enlisted. The industry has also outperformed the S&P 500 over the past three months.
Given that trade war fears are rattling markets again on reports that the United States is contemplating tariffs on imported steel and aluminum from the EU, and possibly Canada and Mexico. The tariff announcement stoked concerns of a global trade war again. Thus, to combat market volatility, investing in packaging stocks seems to be a smart choice, wherein investors can gain impressive returns by banking on the robust industry fundamentals.
For investors’ convenience, we are comparing two major packaging companies which are expected to gain from their solid fundamentals — Sonoco Products Company (SON - Free Report) and Sealed Air Corporation (SEE - Free Report) . While both the packaging stocks have a Zacks Rank #2 (Buy), it will be interesting to see which one is better positioned in terms of fundamentals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Other stocks in the same industry worth considering include Crown Holdings, Inc. (CCK - Free Report) sporting a Zacks Rank #1, and Silgan Holdings Inc. (SLGN - Free Report) , carrying a Zacks Rank #2.
Sonoco’s shares have appreciated 51% over the past year; while Sealed Air has rallied 44%. Sonoco is a clear winner in this respect, with better returns than Sealed Air and the sub industry, which gained 48% during the same period.
The EV/EBITDA metric is usually used to compare two stocks within the same industry or sector, and has an edge over other metrics such as P/E because it is not affected by the different capital structures of the two companies. Compared with the sub-industry’s EV/EBITDA ratio of 12.96, both Sonoco and Sealed Air are underpriced, with respective reading of 8.53 and 8.84. Clearly, Sonoco is cheaper in terms of valuation.
Inventory Turnover Ratio
Over the past year, the inventory turnover ratio for Sonoco and Sealed Air has been 9.08% and 5.78%, respectively, compared to the industry’s level of 6.42%. A higher turnover than the industry average means that inventory is sold at a faster rate, suggesting efficient inventory management. Further, a high inventory turnover rate implies that lesser company resources are tied up in inventory, and the company is able to manage inventory effectively to generate revenues and avoid wastage. Clearly, Sonoco has scored better on this front.
Return on Assets
Return on assets (ROA) is one of the key financial ratios for packaging companies as the firms rely heavily on inventory to generate revenues. An above-average ROA denotes that the company in question is generating earnings by effectively managing assets.
Sonoco and Sealed Air’s ROA for the trailing 12-months (TTM) is 6.56% and 5.75%, respectively. Both companies scored above the industry’s level of 5.62%, with Sonoco faring better than Sealed Air.
In the last one-year period, Sonoco’s dividend yield of 3.16% has been higher than the industry’s 2.05%, while Sealed Air has dividend yield of 1.43. Also, in April 2018, Sonoco’s board of directors rewarded a 5.1% increase in quarterly dividend to 41 cents per share which, also, is a positive signal.
Debt to Capital
Sealed Air has a highly levered balance sheet as evident from its debt-to-capital ratio of 95.5%, much higher than the industry average of 48.3%, and Sonoco’s 41.8%.
Q1 Earnings Performance
In the first quarter of 2018, Sonoco reported adjusted earnings of 74 cents per share, up 25% year over year. The reported figure beat the Zacks Consensus Estimate of 72 cents and came close to the higher end of management’s guided range of 69-75 cents. Its net sales grew 11%, year on year, driven by higher selling prices to counter elevated freight, wages and operating inflation, as well as solid sales from acquisitions, modest volume growth and the positive impact of foreign exchange. (Read more: Sonoco Tops Q1 Earnings & Sales Estimates, Lifts View)
Sealed Air’s first-quarter adjusted earnings improved 19% year over year to 51 cents per share. In addition, earnings surpassed the Zacks Consensus Estimate by a penny. Total revenues also increased 10% year over year in the quarter. Currency had a positive impact on total net sales of 4%, with increased sales across all regions in the quarter. (Read more: Sealed Air Beats on Q1 Earnings, Hikes '18 Outlook)
Earnings Surprise History
Taking a look at the companies’ surprise history, Sonoco has outpaced the Zacks Consensus Estimate in three out of the four trailing quarters, with an average positive earnings surprise of 1.39%. Meanwhile, Sealed Air has delivered positive earnings surprises in the two of the preceding four quarters, generating an average positive earnings surprise of 0.24%.
Earnings Estimate Revisions, Growth
Earnings estimates for Sealed Air have gone up nearly 3% for 2018 and 5% for 2019, in the past 30 days. Meanwhile, estimates remained unchanged for Sonoco for the same time frame.
Sonoco’s 2018 earnings estimates reflects year-over-year growth of 17.9%, while the 2019 earnings estimate reflects year-over-year rise of 5.8%. Sealed Air’s earnings estimates for 2018 and 2019 depict a projected growth of 37.6% and 13.7%, respectively. Sealed Air has long-term expected earnings per share growth rate of 11.60%, way higher than Sonoco’s 4.67%. Sealed Air is a clear winner here.
From our comparative analysis, it is clear that Sonoco is outwitting Sealed Air, when considering price performance, profitability, valuation ratios, inventory turnover, leverage and average positive earnings surprise. However, in terms of earnings growth projections, Sealed Air holds an edge over Sonoco. Thus, it is apparent that Sonoco is better positioned than Sealed Air and thus, calls for investors’ attention.
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