Why Is Sonoco (SON) Up 2.9% Since Last Earnings Report?

A month has gone by since the last earnings report for Sonoco (SON). Shares have added about 2.9% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Sonoco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Sonoco Misses Q3 Earnings & Sales Estimates, Trims View

Sonoco Products Company’s third-quarter 2019 adjusted earnings increased 12.8% year on year to 97 cents per share. Earnings also exceeded the upper-end of management’s guidance of 88-94 cents. The reported figure, however, missed the Zacks Consensus Estimate of 91 cents, resulting in a negative surprise of 6.6%.

On a reported basis, including one-time items, earnings per share came in at 91 cents, compared with the year-ago quarter’s 72 cents.
Sonoco’s net sales came in at $1.35 billion, marginally down from the prior-year quarter’s $1.36 billion. This downside primarily resulted from lower volumes and stronger U.S. dollar, partly offset by increased sales from acquisitions. The sales figure also missed the Zacks Consensus Estimate of $1.38 billion.

Operational Update

Cost of sales came in at $1.09 billion compared with the $1.10 billion recorded in the year-earlier quarter. Gross profit during the third quarter totaled $265.5 million, up from the year-ago quarter’s $259.6 million. Gross margin came in at 19.6% compared with 19.0% reported in the comparable period last year.

Selling, general and administrative expenses totaled $120.3 million, down 11.5% year over year. The downside primarily resulted from acquisition-related costs. Adjusted operating income increased 12.1% year over year to $139 million during the July-September quarter. Operating margin came in at 10.3% compared with the 9.1% recorded in the year-ago quarter.

Segment Performance

The Consumer Packaging segment reported net sales of $581.4 million, down 3.1% from $600.2 million recorded in the prior-year quarter. Operating profit inched up to $56.7 million from the $56 million witnessed in the comparable period last year.

Net sales in the Paper and Industrial Converted Products segment came in at $495.8 million, suggesting an increase of 6.9% year over year on the Conitex acquisition, partly offset by foreign exchange and lower volume. Operating profit totaled $59.4 million compared with the $53.9 million recorded in the comparable period last year.

The Display and Packaging segment’s net sales slipped 12.1% year over year to $145 million. The segment reported an operating profit of $8.9 million compared with $3.7 million reported in the year-earlier quarter.

The Protective Solution segment’s net sales came in at $131.7 million, down 2.9% year over year on lower volume. Operating profit of the segment jumped 34.6% year over year to $14 million.

Financial Performance

Sonoco reported cash and cash equivalents of $115.9 million at the end of the second quarter compared with $250.4 million at the end of the prior-year quarter. The company recorded cash flow from operating activities of $238.8 million in the reported quarter compared with $451.5 million in the year-earlier period.

As of the third quarter’s end, long-term debt was $1.18 billion compared with the $1.19 billion recorded at the end of 2018. As of Sep 30, 2019, the company’s total debt-to-capital ratio was 45.6% compared with 43.9% reported at the end of 2018.

Acquisition

This May, Sonoco signed an agreement to acquire Corenso Holdings America, Inc. from Madison Dearborn Partners, LLC, for a cash consideration of $110 million. The company completed the acquisition in August.
 
Guidance

For 2019, Sonoco now expects adjusted earnings per share guidance of $3.50-$3.54 compared with the prior estimate of $3.52-$3.62. The company reaffirmed its operating cash flow and free cash-flow guidance. Operating cash flow is expected between $435 million and $455 million and free cash flow is projected at $60-$80 million.

For the ongoing quarter, the company projects adjusted earnings per share of 72-76 cents compared with the year-ago quarter’s 84 cents. However, the company anticipates slowdown in customer orders in certain markets.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months. The consensus estimate has shifted -10.56% due to these changes.

VGM Scores

Currently, Sonoco has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Sonoco has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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