Sonoco (SON) Q4 Earnings Miss, Sales Top Estimates, View Up

Sonoco Products Company (NYSE:SON) recently reported fourth-quarter 2017 results, wherein adjusted earnings increased 16% year over year to 72 cents per share and came close to the higher end of management’s guidance range of 68-74 cents. Earnings, however, missed the Zacks Consensus Estimate of 73 cents.

On a reported basis, including one-time items, earnings per share came in at 6 cents compared with $1.04 recorded in the prior-year quarter.

Sonoco’s net sales grew 13.7% year on year to $1.30 billion and also beat the Zacks Consensus Estimate of $1.27 billion. The improvement in sales was driven by higher selling prices to counter elevated raw material prices as well as sales from acquisitions and the positive impact of foreign exchange.

Moreover, Sonoco's diversified mix of its Consumer and Industrial-related businesses drove the top- and bottom-lines results in the fourth quarter. Overall, the reported quarter benefited from a positive price/cost relationship and improvement in productivity and volume/mix.

Operational Update

Cost of sales came in at $1.06 billion, up 13.9% year on year. Gross profit during the reported quarter totaled $242.4 million, a 12.9% improvement year over year. Gross margin contracted 10 basis points (bps) year over year to 18.7%.

Selling, general and administrative expenses were $130 million, up 5.2% year over year, chiefly due to acquisition-related costs and wage inflation. Sonoco’s adjusted operating income totaled $112.4 million in the quarter, up 23% from $91.2 million reported in the prior-year quarter. Operating margin shrunk 70 bps year over year to 8.7% in the fourth quarter.

Segment Performance

The Consumer Packaging segment reported net sales of $554 million, up 14.3% from $485 million recorded in the prior-year quarter, driven by acquisitions, positive translation impact of changes in foreign exchange rates, and higher selling prices. Operating profit was $66 million, up 20.4% from the year-ago quarter.

Net sales at the Paper and Industrial Converted Products segment were $471 million, up 14.2% year over year, led by higher selling prices implemented to recover elevated raw material costs, improved volume/mix and the positive impact of foreign exchange. Operating profit came in at $44 million, surging 71.8% year over year.

The Display and Packaging segment’s net sales came in at $142.4 million, up 25.8% from $113.3 million in the year-earlier quarter, primarily backed by volume growth related to a new pack center near Atlanta, and the positive foreign–exchange impact. The segment reported a loss of $4.1 million in the reported quarter compared with an operating profit of $1.3 million in the year-earlier quarter.

The Protective Solution segment’s net sales came in at $131 million, which remained flat on a year-over-year basis as the positive impact of foreign exchange and higher selling prices were offset by lower volume and mix. Operating profit at the segment totaled $9 million, plunging 28.9% from the comparable quarter last year.

2017 Performance

Sonoco reported adjusted earnings per share of $2.79 in 2017, up 2.6% year over year. Earnings fell short of the Zacks Consensus Estimate of $2.80. On a reported basis, the company posted earnings of $1.74 per share compared to $2.81 recorded in 2016.

Revenues in 2017 grew 5.3% year over year to a record $5.04 billion from $4.78 billion reported in 2016. Revenues also beat the Zacks Consensus Estimate of $5 billion.

Financial Performance

Sonoco recorded cash and cash equivalents of $254.9 million as of Dec 31, 2017, down from $257 million as of Dec 31, 2016. Cash flow from operations came in at $349.4 million in 2017 compared to $398.7 million recorded last year. As of 2017-end, long-term debt was approximately $1.29 billion, up from $1.02 billion at the end of 2016.

As of Dec 31, 2017, the company had a total debt-to-capital ratio of 45.6% compared with 40.4% at Dec 31, 2016. The increase in the debt ratio is primarily due to the $218.8-million acquisition of Peninsula Packaging in March 2017 and the $165-million acquisition of Clear Lam Packaging in July 2017.

Guidance

For full-year 2018, Sonoco raised its adjusted earnings per share guidance to the range of $3.16-$3.26 from the prior range of $3.00-$3.10. Compared with the earnings of $2.79 per share in 2017, the mid-point of the guidance reflects year-over-year growth of 15%.

For first-quarter 2018, the company projects adjusted earnings per share in the range of 69-75 cents. The guidance reflects an effective tax rate of between 26% and 27% following implementation of the U.S. Tax Cuts and Jobs Act. Compared with the prior-year quarter’s earnings per share of 59 cents, the mid-point of the guidance reflects year-over-year growth of 22%.

Sonoco remains aligned on implementing its Grow and Optimize strategy in 2018. The company remains focused on targeted acquisitions, development of new products, optimizing results through process improvement and active cost management. It also sees opportunities from the upbeat job market and income prospects in the United States.

However, Sonoco remains cautious about uncertainties regarding the overall economy and potential changes in raw material prices and other costs. The company had to implement prices increases for many products so far in 2018 due to inflationary cost pressures in freight, labor, energy and material costs.

In addition, negative trends in packaged food and grocery store sales remains a concern as consumers are focused on fresh and natural alternatives, and expanding e-commerce options.

Share Price Performance

Over the past year, Sonoco has underperformed the industry it belongs to. The stock has lost around 6.7%, while the industry has recorded growth of 6.8%.

Zacks Rank & Key Picks

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

Better-ranked stocks in the same sector include Packaging Corporation of America (NYSE:PKG) , AptarGroup, Inc. (NYSE:ATR) and Bemis Company, Inc. (NYSE:BMS) . While Packaging Corporation sports a Zacks Rank #1 (Strong Buy), AptarGroup and Bemis carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Packaging Corporation has a long-term earnings growth rate of 8.3%. Its shares have gained 12.1%, over the past six months.

AptarGroup has a long-term earnings growth rate of 8.5%. The company’s shares have rallied 12.7% during the same time frame.

Bemis has a long-term earnings growth rate of 7%. The stock has gained 10.3% in six months’ time.

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