We maintain our Neutral recommendation on Sonoco Products Co. (SON), a global manufacturer of consumer and industrial packaging products.
Sonoco’s first-quarter 2012 adjusted earnings per share decreased 9.6% to 52 cents. Net sales increased 8.5% to $1.21 billion. Both were ahead of Zacks Consensus Estimates.
Sonoco aims to grow sales to between $5.5 billion and $6 billion over the next three to four years, improve margins to 10% to 10.5% and increase return on net assets employed to 12.5%. Growth drivers continue to be organic sales growth, geographic expansion and strategic acquisitions.
Sonoco’s recent acquisition of Tegrant, a leading provider of highly engineered protective, temperature-assured and retail security packaging solutions, is the largest in the company’s history. The $550 million deal will position Sonoco as the leader in multimaterial protective packaging in North America. The combined entity is estimated to generate sales of approximately $5 billion in 2012 and Sonoco estimates synergies of $12 million. Future acquisitions are targeted to add up to $500 million more in annual sales.
Sonoco’s target is to be the global leader in customer-preferred, low-cost packaging solutions within targeted customer market segments. Due to the cost-competitive nature of its businesses, Sonoco regularly evaluates its cost structure. During 2011, Sonoco announced closures of a flexible packaging facility in Canada, a thermoformed plastic packaging facility in Canada, a tube and core facility in France, and a fulfillment service center and a point-of-purchase display manufacturing facility in the United States. In addition, the company divested two small businesses, a plastics operation in Brazil and a tubes and cores operation in the United States, and realigned its fixed cost structure.
Sonoco has hiked its quarterly dividend from 29 cents to 30 cents a share or $1.20 per share annually, representing a yield of around 3.7%. The company’s objective is to deliver average annual double-digit returns to shareholders over time. Sonoco thus focuses on three major areas – driving profitable sales growth, improving margins and leveraging its strong cash flow and financial position.
However, on the flipside, volatile raw material prices and uncertainty among its customers, given the slow recovery in the domestic market and ongoing European weakness, remain headwinds for the company in fiscal 2012.
Furthermore, given the magnitude of the Sonoco and Tegrant merger, integration risks continue to be a challenge. In addition, Sonoco’s failure to realize synergies from the acquisition could negatively impact the company’s earnings.
We thus have a long-term Neutral recommendation on Sonoco. However, in the near term, the stock retains a Zacks #2 Rank (short-term Buy rating).
Sonoco has 349 operations in 34 countries throughout North and South America, Europe, Australia and Asia. The company now reports its financial results in four reportable segments: Consumer Packaging, Paper and Industrial Converted Products, Packaging Services and Protective Packaging. It competes with the likes of Bemis Company, Inc. (BMS) and Rock-Tenn Co. (RKT).
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