Sonoco Products Company (SON - Free Report) is poised to gain from its consumer packaging business, focus on productivity improvement and cost-control initiatives. A strong balance sheet also enables the company to invest in growth and acquisitions. However, higher material costs and the coronavirus pandemic’s unfavorable impact on the company’s operations are concerns.
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 for investors.
The company has an estimated long-term earnings growth rate of 5%.
Positive Earnings Surprise History
Sonoco delivered a positive average earnings surprise history of 4.11% in the trailing four quarters.
The trailing 12-month EV/EBITDA ratio is 8.0 for the company, while the industry's average trailing 12-month EV/EBITDA ratio is pegged higher at 16.7
Superior Return on Assets
Sonoco currently has a Return on Assets (ROA) of 7.3%, higher than the industry’s 4.9%. An above-average ROA denotes that the company is generating earnings by effectively managing its assets.
Growth Drivers in Place
Sonoco expects the Consumer Packaging segment to perform well in the second quarter as approximately 80% of the segment’s sales come in from food packaging where the company is witnessing increased orders. Further, paperboard operations in North America are likely to be relatively steadier in the June-end quarter as elevated demand for the tissue and towel market will help offset declines from some industrial converted-product businesses.
Sonoco’s focus on optimizing businesses through productivity improvement, standardization and cost control will also aid its performance in the near term. Further, the company is focused on driving growth, 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 place it well to navigate through the current crisis. In order to strengthen its cash flow and liquidity position, Sonoco is reducing planned capital expenditure for the current year, deferring pension-termination contributions to 2021, while also trimming operating expenses. Sonoco also remains focused on acquisitions in targeted growth areas of flexible packaging and thermal formed rigid plastic containers, and development of new products.
Few Headwinds to Counter
Sonoco has withdrawn financial guidance for the current year citing the uncertainty regarding the severity and duration of the pandemic and inability to ascertain its impact on the company's served markets.
Furthermore, higher prices of Old Corrugated Containers (OCC) are likely to depress operating margins in the near term, while elevated recycled fiber prices will impact the company’s paper-based businesses during the second quarter until it achieves recovery of higher cost in the second half of the year.
Shares of Sonoco have gained 14.1% over the past three months compared with the industry's growth of 21%.
Stocks to Consider
Some better-ranked stocks in the Industrial Products sector are Lakeland Industries, Inc. (LAKE - Free Report) , Broadwind Energy, Inc. (BWEN - Free Report) and Axon Enterprise, Inc. (AAXN - Free Report) . While Lakeland Industries sports a Zacks Rank #1 (Strong Buy), Broadwind Energy and Axon carry a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Lakeland Industries has a projected earnings growth rate of 127.8% for fiscal 2020. The company’s shares have appreciated 44.1% in the past three months.
Broadwind Energy has an expected earnings growth rate of 174% for 2020. The stock has gained 6% over the past three months.
Axon has an estimated earnings growth rate of 14.4% for the ongoing year. The company’s shares have rallied 21.3% in the past three months.
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