Sonoco (SON) Up 2.2% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Sonoco (SON). Shares have added about 2.2% 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 […]

A month has gone by since the last earnings report for Sonoco (SON). Shares have added about 2.2% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Sonoco’s Earnings Beat, Sales Miss Estimates in Q2

Sonoco reported adjusted earnings of 79 cents in second-quarter 2020, which outpaced the Zacks Consensus Estimate of 78 cents. The figure, however, declined 16.8% from the prior-year quarter. The bottom line came within management’s guidance of 73-83 cents on strong productivity, cost-reduction actions and contributions from recent acquisitions. However, these gains were partly offset by negative volume/mix, negative price and cost, unfavorable impact of foreign-exchange translation as well as higher tax and interest rates.

On a reported basis, including one-time items, earnings per share came in at 55 cents compared with the year-ago quarter’s 80 cents.

Sonoco’s net sales came in at $1.25 billion, missing the Zacks Consensus Estimate of $1.31 billion. The top line also declined 8.4% year over year on lower volume/mix, reduced selling prices and a stronger U.S. dollar. However, higher sales from acquisitions somewhat offset these negatives.

Operational Update

Cost of sales came in at around $998 million compared with the $1,084 million witnessed in the year-earlier quarter. Gross profit during the reported quarter totaled $248 million, down from the year-ago quarter’s $275 million. Gross margin came in at 19.9% compared with the 20.2% reported in the prior-year period.

Selling, general and administrative expenses totaled $121.4 million, down 8% year over year. This can primarily be attributed to the company’s focus on reducing controllable costs across its business. Adjusted operating income declined 11.8% year over year to $127 million during the June-end quarter. Operating margin came in at 10.2% compared with the year-ago quarter’s 10.6%.

Segment Performance

The Consumer Packaging segment reported net sales of $615 million, up 2% from the prior-year quarter’s $603 million. Operating profit climbed to $86 million from the $63 million recorded in the comparable period last year.

Net sales in the Paper and Industrial Converted Products segment came in at $434 million, marking a year-over-year decline of 11.6%. Operating profit totaled $29.9 million compared with the $61.2 million witnessed in the year-ago period.

The Display and Packaging segment’s net sales declined 20.7% year over year to $107 million. The segment reported an operating profit of $5.9 million, flat compared with the year-earlier quarter.

The Protective Solution segment’s net sales came in at $89 million, down 32% year over year. Operating profit of the segment slumped 71.4% year over year to $4.5 million.

Financial Performance

Sonoco reported cash and cash equivalents of $857.3 million at the end of second-quarter 2020 compared with the $96.2 million witnessed at the end of prior-year quarter. The company recorded cash flow from operating activities of $281 million in the first half of 2020 compared with $40 million in 2019. In the second quarter, free cash flow was $123 million compared with cash outflow $145 million in the same period last year.
 
As of the second quarter’s end, total debt was $2.27 billion compared with the $1.68 billion recorded at the end of 2019. At the end of the second quarter, the company’s total debt to total capital ratio was 55.6% compared with the 48.1% at the end of 2019.

Q3 Guidance

Sonoco expects third-quarter adjusted earnings per share between 73 cents and 83 cents compared with earnings of 97 cents per share reported in third-quarter 2019. The company anticipates global macroeconomic conditions to gradually improve from the second-quarter levels. However, recovery in demand might be offset by resurgence of coronavirus cases, slowing the reopening of business activities.

Sonoco anticipates Consumer Packaging business to continue performing well in the September-end quarter as sales from food packaging will continue to benefit from stay-at-home customers. Approximately 80% of the Consumer Packaging segment’s sales come from food packaging where the company is witnessing increased orders.

Nevertheless, industrial-related markets will witness bleak demand compared with the previous year. The Paper and Industrial Converted Products segment will be affected by a negative price/cost relationship during the third quarter due to year-over-year higher recycled fiber costs and lower market pricing, while stable OCC price will likely improve price/cost for the remaining period of the current year. The Display and Packaging business will continue to face weak retail promotional display activity, which might be partly offset by cost-control actions.

Meanwhile, the Protective Solutions segment is likely to witness improved demand in the third quarter, as automotive and appliance markets have started to recover gradually. The ThermoSafe temperature-assured packaging business will gain from a strong flu vaccine season, and higher demand from its base pharmaceutical and food customers during the quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -5.24% due to these changes.

VGM Scores

At this time, Sonoco has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, 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 A. If you aren’t focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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