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Sonoco Trims 3Q Guidance

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Sonoco Products Co. (SON - Free Report) has lowered its earnings guidance for the third quarter of fiscal 2012 to a band of 51–53 cents from the prior guidance of 62–66 cents.
Operating hindrances at several of the company's North American uncoated recycled paperboard mills, resulting in unscheduled downtime and excess costs and lower-than-expected volumes in many of its consumer and industrial packaging units have been cited as the reasons for the outlook reduction.  
Compared with the prior-year third quarter earnings of 66 cents, Sonoco’s new guidance reflects annual decline of 20% to 23%, down from the previous expectation of a decline 6% to 0%. The Zacks Consensus Estimate for the third quarter is currently pegged at 64, above the company’s guided range. We expect significant downward estimate revision following the revised guidance. 
The company has withdrawn its earlier fiscal 2012 guidance of $2.34 to $2.39. Sonoco will provide more light on its fourth quarter and fiscal 2012 expectations when it releases its third quarter results on October 18, 2012. The Zacks Consensus Estimate for the fourth quarter currently stands at 61 cents while the same for fiscal 2012 is $2.35, reflecting an annual climb of 33% and 3%, respectively. 
Sonoco’s second-quarter 2012 adjusted earnings were 58 cents per share compared with 60 cents in the year-ago quarter, in line with the Zacks Consensus Estimate. Net sales increased 6.6% to $1.20 billion, missing the Zacks Consensus Estimate of $1.22 billion. The year-over-year improvement in sales was attributable to the acquisition of Tegrant Corp., partially offset by lower volume and currency translation effect.
The company’s second quarter performance was affected by the soft global economic conditions, higher pension related expenses and foreign currency translation. Net sales in all the segments except Protective Packaging declined on a year-over-year, driven by higher expenses and negative currency translation.
We believe that the company would be benefited by the Tegrant acquisition going forward. Sonoco’s acquisition of Tegrant will position it as the leader in North America’s multimaterial protective packaging.
The company expects to expand sales to $5.5 billion-$6 billion over the next three to four years, improve margins to 10%-10.5% and increase return on net assets employed to 12.5%, driven by organic sales growth, geographic expansion and strategic acquisitions. However, volatile raw material prices and uncertainty among its customers remain concerns.
Sonoco competes with the companies like Bemis Company, Inc. (BMS - Free Report) and Rock-Tenn Co. . Sonoco retains a short-term Zacks #3 Rank (Hold rating). We have a long-term Neutral recommendation on the stock.

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