Sonoco Products (SON) Down 6% Since Earnings Report: Can It Rebound? – August 22, 2017

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It has been about a month since the last earnings report for Sonoco Products Company (SON Free Report) . Shares have lost about 6% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock’s next earnings release, or is it due for a breakout? 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 drivers.

Sonoco Q2 Earnings Beat Estimates, Narrows Guidance

Sonoco Products reported second-quarter 2017 adjusted earnings of $0.71 per share, down 3% year over year. However, earnings beat the Zacks Consensus Estimate of $0.70 and came within management’s guidance range of $0.67–$0.73. 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 $0.43 compared with $0.55 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.

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.

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 $0.07 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 $0.71–$0.77. 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 $0.73, the mid-point of the guidance reflects year-over-year growth of 1%.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.

Sonoco Products Company Price and Consensus

 

VGM Scores

At this time, the stock has a poor Growth Score of F, however its Momentum is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

The company’s stock is suitable solely for value based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.

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