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Why Hold Strategy is Apt for Sonoco (SON) Stock Right Now

Zacks Equity Research

Sonoco Products Company SON is poised to gain from pricing initiatives, focus on new product development, and acquisitions despite input cost inflation.

 

Below, we briefly discuss the company's potential growth drivers and possible challenges.

 

Factors Favoring Sonoco

 

Favorable Zacks Rank & VGM Score

 

Sonoco carries a Zacks Rank #3 (Hold). It has a VGM Score of B. Here V stands for Value, G for Growth and M for Momentum. The company's score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 make solid investment choices.

 

Price Performance

 

 

Shares of Sonoco have gained around 25.7% over the past year against the industry 's decline of 1.8%.

 

Positive Earnings Surprise History

 

Sonoco outpaced the Zacks Consensus Estimate in the trailing four quarters, recording average beat of 4.88%.

 

Cheaper Valuation

 

The trailing 12-month EV/EBITDA ratio is 9.8 for the company while the industry's average trailing 12-month EV/EBITDA ratio is pegged higher at 11.3. This implies that the stock is cheaper.

 

Return on Assets

 

Sonoco currently has a Return on Assets (ROA) of 7.4% while the industry recorded ROA of 6.0%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.

 

Upbeat 2019 Guidance

 

For 2019, Sonoco’s adjusted earnings per share guidance is in the range of $3.47 to $3.57. The mid-point of the guidance reflects an improvement of 4% over earnings of $3.37 per share in 2018. The company’s first-quarter 2019 earnings outlook is at 77-83 cents per share compared with 74 cents recorded in the year-ago quarter. The mid-point of the new guidance reflects year-over-year growth of 8%.

 

Earnings growth in the first quarter and full-year 2019 is likely to be aided by a combination of positive price and cost, higher volumes, and benefits from the Conitex and Highland acquisitions.

 

The company remains optimistic about global economic activity. Sonoco believes the breadth of its diversified consumer, and industrial and protective operations across a number of markets are likely to drive consistent earnings and improve returns. Further, the company will gain from its pricing initiatives which in turn will aid it in combatting inflation.

 

Growth Drivers in Place

 

The company steadily focuses on targeted acquisitions as well as development of products. In October 2018, the company acquired the remaining 70% interest in the Conitex-Sonoco joint venture and Texpack's composite can operation in Spain. The buyout of Conitex Sonoco will assist the company in expanding manufacturing presence in the Americas, Europe, and rapidly growing emerging markets in Asia. It will also help build strong customer relationships by offering innovative packaging solutions in paperboard, textile carriers and other value-added products. The acquisition is expected to add around $260 million of annual sales in the Company's Paper and Industrial Converted Products segment.

 

The company previously completed the buyout of Highland Packaging Solutions on April 2018 and bought Clear Lam July 2017. The Highland acquisition is anticipated to add around $110 million annual sales in the Consumer Packaging segment. These acquisitions are likely to be accretive to the company’s earnings growth in 2019.

 

Sonoco also continues to focus on optimizing businesses through process improvement, standardization, cost control and commercial excellence. Its focus on thermoformed plastics, flexible packaging and consolidating industrial opportunities, particularly in the emerging markets, will also aid growth.

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The company has an estimated long-term earnings growth rate of 4.7%.

 

Headwinds to Conquer

 

Impact of tariffs on steel, aluminum and other products will continue to hurt Sonoco's results. The company is also facing inflationary cost pressure from higher freight, wages, energy and elevated cost for materials, particularly resins. We believe the company will gain from its pricing initiatives to combat inflation.

 

Over the past few years, Consumer Packaging volumes have been flat to down as consumers' preference for packaged food is being impacted by changing taste for more fresh and natural products.

 

Bottom Line

 

Investors are likely to retain the stock at present as it has ample prospects for outperforming its peers in the near future.

 

Meanwhile, investors interested in the Industrial Products sector can consider better-ranked players like Mueller Industries, Inc. MLI, Albany International Corp. AIN and Avery Dennison Corporation AVY. While Mueller Industries and Albany International sport a Zacks Rank #1, Avery Dennison carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Mueller Industries has expected earnings growth rate of 2.2% for 2019. The company’s shares have rallied 38% year to date.

 

Avery Dennison has projected earnings growth rate of 8.4% for the current year. The stock has appreciated 24% year to date.

 

Albany International has estimated earnings growth rate of 44.7% for the ongoing year. The company’s shares have gained 18% year to date.

 

Zacks' Top 10 Stocks for 2019

 

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

 

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

 

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