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Sonoco (SON) Q2 Earnings Beat Estimates, Narrows Guidance

Sonoco Products Company SON reported second-quarter 2017 adjusted earnings of 71 cents per share, down 3% year over year. However, earnings beat the Zacks Consensus Estimate of 70 cents and came within management’s guidance range of 67–73 cents.

The bottom line was negatively impacted by lower volume/mix, inflated operating costs and higher taxes. These were partially mitigated by positive price/cost relationship, manufacturing productivity improvements, and lower management incentives.

On a reported basis, including one-time items, earnings per share was 43 cents compared with 55 cents in the prior-year quarter.
 

 

Operational Update

Net sales of $1.24 billion were up 2.9% year on year, and also beat the Zacks Consensus Estimate of $1.22 billion. Higher selling prices to combat rising raw material prices and incremental sales from acquisitions (net of divestitures) were somewhat negated by lower volume and the negative impact of foreign exchange.

Cost of sales was $1 billion, up 4.3% year on year. Gross profit during the quarter totaled $236 million, down 3% year over year. Gross margin contracted 110 basis points (bps) year over year to 19% hurt by lower volume/mix and higher raw material prices, partially offset by manufacturing productivity gains.

Selling, general and administrative expenses were $157 million, up 24% year over year, chiefly due to lump sum pension settlements, acquisition and acquisition-related costs and wage inflation. Lower management incentives were a minor neutralizing factor. Sonoco’s adjusted operating income was $78.7 million in the quarter, down 32% from $115 million in the prior-year quarter. Operating margin contracted 330 bps year over year to 6.3% in the quarter.

Sonoco Products Company Price, Consensus and EPS Surprise

 

Sonoco Products Company Price, Consensus and EPS Surprise | Sonoco Products Company Quote

Segment Performance

The Consumer Packaging segment reported net sales of $521 million, up 2% from $511 million in the prior-year quarter. Operating profit was $59 million, a 1% decline from the year-ago quarter.

Net sales at the Paper and Industrial Converted Products segment were $469 million, up 8% year over year. Operating profit was $43 million, a 19% year-over-year improvement.

The Display and Packaging segment’s net sales came in at $115 million, down 11.7% from $131 million in the year-earlier quarter. Operating profit was $1.4 million, a 71% plunge from the prior-year quarter.

The Protective Solution segment’s net sales came in at $134 million, up 3% year over year. Operating profit at the segment was $10.9 million, down 23% from the year-ago quarter.

Financial Performance

Sonoco reported cash and cash equivalents of $207.6 million at the end of the second quarter, down from $257 million as of Dec 31, 2016. In the first half of fiscal 2017, Sonoco’s cash flow from operations was $104.3 million, down from $186 million in the prior-year comparable period. At second-quarter end, long-term debt was approximately $1.19 billion, up from $1.02 billion at the end of 2016.

Earlier this month, the U.S. Trade Commission granted Sonoco early termination of the waiting period for its acquisition of Clear Lam Packaging, Inc. In Jun 2017, Sonoco had signed a definitive agreement to acquire 100% stake of Clear Lam Packaging for around $170 million. Clear Lam Packaging is a leading developer, manufacturer and converter of innovative flexible and forming film packaging materials used with fresh and processed foods, personal health care products, electronics, household products and industrial products The buyout will significantly expand Sonoco’s Flexible Packaging and Thermoforming Plastics operations.

Guidance

For 2017, Sonoco narrowed earnings per share guidance to the range of $2.73–$2.80 from the prior range of $2.73–$2.83. This includes a targeted gain of 7 cents per share from current year acquisitions. Compared with the earnings of $2.72 per share in 2016, the mid-point of the guidance reflects a year-over-year growth of 1.7%.

For third-quarter 2017, the company expects earnings per share in the range of 71–77 cents. This guidance takes into consideration the impact of acquisitions, net of divestitures, and higher recovered paper prices during the third quarter. Compared with the prior-year quarter’s earnings per share of 73 cents, the mid-point of the guidance reflects year-over-year growth of 1%.



In the last one year, Sonoco has underperformed the industry it belongs to. The stock gained around 3.7%, while the industry rose 16%.

Zacks Rank & Key Picks

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

Better-ranked stocks in the same space include AptarGroup, Inc. ATR, Caterpillar, Inc. CAT, and Avery Dennison Corporation AVY. All three of these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AptarGroup generated a positive average earnings surprise of 1.78% in the trailing four quarters. Caterpillar has delivered an average positive earnings surprise of 40.25% in the last four quarters. Avery Dennison has delivered an average positive earnings surprise of 5.53% in the trailing four quarters.

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