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Sonoco (SON) Maintains 2017 Outlook, Issues 2018 View

By Zacks Investment ResearchStock MarketsDec 04, 2017 05:16AM ET
Sonoco (SON) Maintains 2017 Outlook, Issues 2018 View
By Zacks Investment Research   |  Dec 04, 2017 05:16AM ET
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Sonoco Products Company (NYSE:SON) recently reaffirmed its 2017 EPS guidance as well as issued the 2018 financial guidance and provided updates for strategic priorities. The company is poised to gain from its 20/20 Vision strategy, acquisitions and by developing new products. The details are discussed below.

Maintains 2017 EPS Guidance

The company reiterated its adjusted earnings per share guidance range of $2.75-$2.81. Compared with earnings of $2.72 per share in 2016, the mid-point of the guidance reflects year-over-year growth of 2.2%. For fourth-quarter 2017, Sonoco also maintained its adjusted earnings per share range of 68-74 cents. Compared with the prior-year quarter’s earnings per share of 62 cents, the mid-point of the guidance indicates 14.5% year-over-year growth.

Projects 10% EPS Growth in 2018

Sonoco estimates that its adjusted earnings per share for 2018 will be in the range of $3.00-$3.10. The projected mid-point target of $3.05 per share assumes a positive impact of 11 cents per share from 2017 acquisitions and 16 cents per share contribution from volume growth. The mid-point target reflects estimated growth of around 10% from the company’s 2017 EPS forecast.

In addition, a positive price/cost relationship driven by procurement productivity and commercial excellence initiatives will contribute 18 cents per share, and manufacturing productivity is estimated to exceed non-material inflation and other cost changes by 6 cents per share. However, these favorable factors are expected to be offset by 18 cents per share negative impact from increased fixed costs and 10 cents per share of higher depreciation.

Finally, the benefit of lower pension benefit expenses and positive impact of a stronger dollar against other currencies will add approximately 7 cents per share, which is expected to be more than offset by 3 cents associated with elevated interest expense and a slightly higher share count.

Notably, Sonoco projects 2018 net sales to be nearly $5.3 billion — an estimated increase of 6% from the company’s 2017 sales forecast. Sales growth in 2018 will be contributed by acquisitions of $128 million and volume/mix growth of approximately $117 million. In addition, higher expected selling prices and a favorable impact of foreign exchange will likely add $63 million to net sales.

Strong Improvement Anticipated in 2018 Cash Flow

Sonoco expects to report around $415 million in cash from operations in 2017, and spend approximately $190 million on capital investments and $155 million in dividends. Subsequent to these, the company will have free cash flow of about $70 million.

For 2018, the company expects cash from operations to be around $532 million and free cash flow to be about $150 million, after spending $220 million in capital investments and paying $162 million dividends. The company expects free cash flow to more than double from 2017 due to higher projected earnings and lower expected pension contributions, partially offset by higher capital expenditures and increasing dividends.

20/20 Vision to Boost Top and Bottom Lines

Sonoco targets sales to be up more than $6 billion over the long term. The company’s outlook is backed by greater-than-industry-average organic growth and accretive acquisitions. Its future acquisitions will remain focused on flexible packaging, thermoformed containers, protective packaging and consolidating industrial acquisitions, which will help advance its capability in emerging markets.

Sonoco’s 2018 capital-deployment strategy will be driven by investing in existing businesses, including significant investment in the domestic paper mill system as well as organic growth initiatives, particularly in thermoformed containers. The company will also remain focused on returning cash to shareholders in the form of dividends and share repurchases.

Acquisitions & Product Launches

Sonoco’s acquisition of Peninsula Packaging earlier this year expands its position to serve the perimeter of the supermarket. Further, the acquisition of Clear Lam will significantly expand Sonoco’s Flexible Packaging and Thermoforming Plastics operations.

Notably, Sonoco will expand its thermoforming operations by investing approximately $15-$20 million in 2018 to produce thermoformed bowls and trays, which is expected to add approximately $30 million in sales starting late in 2018 and into 2019.

Additionally, Sonoco’s TruVue clear plastic can is continuing to expand with new customers. Pacific Coast Producers of Lodi, CA, is set to launch multiple fruit products in Sonoco’s innovative TruVue container over the next several months with several leading retailers, including Wegmans, H-E-B, Fairway, HyVee and Wakefern.

Partnership with Clemson University

Recently, Sonoco entered into a new research partnership with Clemson University — the Sonoco FRESH (Food Research Excellence for Safety and Health). The idea behind the deal is to develop new technologies and forms of packaging to optimize the fresh food lifecycle.

These days the food industry is facing serious challenges due to the crisis of food waste. Each year, the industry incurs a loss of around $15.6 billion due to food spoilage in the retail sector. To cope with the challenge, Sonoco is working hard by focusing on technologies which will aid brands and retailers to extend sales opportunities.

Notably, the Sonoco Institute of Packaging Design and Graphics at Clemson University was created to develop the synergies between the graphic communications and packaging science departments. Per the plan, Sonoco will contribute $1.725 million over five years to set up a multi-disciplinary hub for innovation and research in order to improve fresh food packaging and distribution. The company will also fund business-driven research projects totaling $1 million over that period. Sonoco FRESH is an extension of the partnership.

Sonoco FRESH will help reform fresh food packaging, resulting in widening of shelf life and maintaining quality of products. The initiative will also help inform students about the issues related to the crisis of food waste and sustainability.

Bottom Line

Sonoco expects to grow its composite can-production capability in emerging markets to serve snack food customers, including expansion over the next few years in Thailand, South Africa and Brazil. Its new contracts and affiliations will also drive results in future.

Share Price Performance

Despite these positives, Sonoco's shares have underperformed the industry in the past year due to slowdown in manufacturing in the United States and emerging markets, along with headwinds from a strong dollar. The company’s shares have inched up just 1.6%, while the industry recorded 13.6% growth during this time frame.

Zacks Rank & Other Key Picks

Currently, Sonoco carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the same sector are Caterpillar Inc. (NYSE:CAT) , Nine Dragons Paper (Holdings) Ltd. (OTC:NDGPY) and Fanuc Corp. (OTC:FANUY) . Caterpillar and Nine Dragons Paper flaunt a Zacks Rank of 1 (Strong Buy), while Fanuc carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Caterpillar has a long-term earnings growth rate of 10.3%. Its shares have been up 52.6% year to date.

Nine Dragons Paper has a long-term earnings growth rate of 18%. So far this year, its shares have rallied 106.6%.

Fanuc has a long-term earnings growth rate of 11.8%. So far this year, its shares have gained 50.8%.

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Sonoco Products Company (SON): Free Stock Analysis Report

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Zacks Investment Research
Sonoco (SON) Maintains 2017 Outlook, Issues 2018 View

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Sonoco (SON) Maintains 2017 Outlook, Issues 2018 View

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