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Acquisitions & Product Innovation Aid Sonoco Amid Cost Woes

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On Dec 23, we issued an updated research report on Sonoco Products Company SON. The company is poised to gain from pricing initiatives and focus on new product development. A strong balance sheet also enables the company to invest in growth and acquisitions.

Projects Record 2020 Earnings Performance

For 2020, Sonoco anticipates earnings per share to lie within $3.65 and $3.75. The mid-point of the target range is at $3.70 per share. If achieved, it would be a record for the company. The EPS guidance factors in positive impact from acquisitions, volume/mix and productivity initiatives. However, these benefits are likely to be partially offset by negative price/cost relationship primarily due to higher operating, and adverse impact of higher depreciation and amortization and other costs.

Sonoco projects sales for 2020 at $5.55 billion, marking estimated year-over-year growth of 3%. The company expects to deliver 4% organic growth in Flexible packaging and 4-5% organic growth in Rigid Plastic Packaging in 2020.

Upbeat Current-Year Guidance

For 2019, Sonoco anticipates adjusted earnings per share in the range of $3.50 to $3.54. The mid-point of the guided range indicates an improvement of 4% from 2018. The current-year earnings will likely be driven by positive price and cost, lower tax rate, and benefits from the Conitex and Corenso acquisitions. The company’s focus on optimizing businesses through process improvement, standardization and cost control will also aid results.

Acquisitions to Drive Growth

Sonoco plans to pursue accretive acquisitions in targeted consumer and industrial markets. In October 2018, the company acquired the remaining 70% interest in the Conitex-Sonoco joint venture and Texpack's composite can operation in Spain. The buyout have enabled the company in expanding manufacturing presence in the Americas, Europe, and rapidly growing emerging markets in Asia. Moreover, Sonoco’s acquisition of Corenso Holdings America has created a long-term opportunity for the company by expanding its paperboard and core converting operations.
Recently, the company agreed to acquire TEQ from ESCO Technologies, for a cash payment of $187 million. The buyout will facilitate further expansion of Sonoco’s growing healthcare packaging business. The deal is expected to be conducive to Sonoco’s 2020 earnings. TEQ’s financial results will be reported within Sonoco’s Consumer Packaging segment.

Strong Financial Position to Propel Growth

The company is focused on driving growth, margin expansion and generating solid free-cash flow. Its strong balance sheet enables the company to invest in capacity and pursue acquisitions.  For 2020, operating cash flow is projected at around $635 million. The company expects to generate free cash flow of $260 million, after spending $195 million in capital investments and a dividend payout of $180 million, subject to its board’s approval. Working capital management and strategic capital expenditure are likely to boost free cash flow.

The company plans to turn the consumer packaging segment around in fiscal 2020, and grow and optimize its industrial packaging. The company will continue its portfolio-optimization initiatives. It plans to focus on profitable growth through new products, customers and sustainable products. Margin expansion is expected to be aided by commercial excellence, operating excellence and SG&A cost control.

Few Headwinds to Counter

Sonoco’s margins are likely to be affected by tariffs on steel, aluminum and other products. The company is also facing inflationary-cost pressure, thanks to higher freight, wages, energy and elevated cost for materials.
Moreover, Sonoco’s operating cash flow and free cash flow for the current year are anticipated to be unfavorably impacted by the estimated $200-million full-year after-tax cash-flow from the company's voluntary contributions to U.S. defined benefit-pension plans. Thus, the company maintains its operating cash-flow guidance at $435-$455 million and free cash flow in the $60-$80 million band for the ongoing year.

Sonoco Products Company Price and Consensus

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Reliance Steel & Aluminum Co. (RS - Free Report) . While Northwest Pipe and Tennant sports a Zacks Rank #1 (Strong Buy), Reliance Steel & Aluminum carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 43.8% over the past year.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 44.2% over the past year.

Reliance Steel & Aluminum has an estimated earnings growth rate of 7.4% for the ongoing year. In a year’s time, the company’s shares have gained 60.8%.

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