Sonoco (SON) Down 18.3% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Sonoco (SON). Shares have lost about 18.3% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Sonoco due for a breakout? 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 drivers.

Sonoco's Earnings In Line, Sales Miss Estimates in Q4

Sonoco’s fourth-quarter 2019 adjusted earnings declined 10.7% year on year to 75 cents per share. The reported figure came in line with the Zacks Consensus Estimate. The year-over-year drop in earnings resulted from lower effective tax rate and hurricane-related business interruption insurance proceeds last quarter. Further, gains from productivity improvements and acquisitions were offset by lower volume/mix, negative price/cost relationship and unfavorable foreign-currency translation impact.

On a reported basis, including one-time items, earnings per share came in at 44 cents compared with the year-ago quarter’s 77 cents.

Sonoco’s net sales came in at $1.31 billion, marginally down from the prior-year quarter’s $1.36 billion. The sales figure also missed the Zacks Consensus Estimate of $1.33 billion. The top-line figure declined year-over-year due to softer volumes across all segments, along with lower selling prices in the Paper and Industrial Converted Products segment, foreign-currency translation impact. These negatives were partly offset by higher sales from the Corenso acquisition.

Operational Update

Cost of sales came in at $1.06 billion compared with the $1.10 billion recorded in the year-earlier quarter. Gross profit during the fourth quarter totaled $246.8 million, down from the year-ago quarter’s $254.3 million. Gross margin came in at 18.8% compared with the 18.7% reported in the year-earlier period.

Selling, general and administrative expenses totaled $135.8 million, down 8.7% year over year. This decline primarily resulted from lower acquisition-related costs in 2019 as well as the company’s prudent cost-control measures. Adjusted operating income edged down 1.9% year over year to $114 million during the October-December period. Operating margin came in at 8.7% compared with the 8.5% recorded in the year-ago quarter.

Segment Performance

The Consumer Packaging segment reported net sales of $559.6 million, down 2.5% from $573.9 million recorded in the prior-year quarter. Operating profit climbed to $46.6 million from the $43.7 million witnessed in the comparable period last year.

Net sales in the Paper and Industrial Converted Products segment came in at $491.5 million, indicating a 4% decline, year over year, on lower selling prices primarily in global paperboard, corrugating and recycling operations, lower volume/mix, and negative foreign-currency translation impact. These positives were partially offset by the Corenso acquisition. Operating profit totaled $50 million compared with the $56 million recorded in the year-ago period.

The Display and Packaging segment’s net sales slipped 3.2% year over year to $136.7 million. The segment reported an operating profit of $6.5 million compared with the $8.4 million reported in the year-earlier quarter.

The Protective Solution segment’s net sales came in at $121 million, down 5.5% year over year on lower volume and mix. Operating profit of the segment jumped 37.5% year over year to $11 million.

Financial Performance

Sonoco reported cash and cash equivalents of $145.2 million at the end of the fourth quarter compared with $120.3 million at the end of 2018. The company recorded cash flow from operating activities of around $426 million in 2019 compared with the prior year’s $590 million. As the end of 2019, the company’s total debt-to-capital ratio was 48.1% compared with the 43.9% reported at the end of 2018.

2019 Results

Sonoco reported adjusted earnings per share of $3.53 in 2019, up 4.7% from the prior year’s $3.37. Earnings missed the Zacks Consensus Estimate of $3.54. On a reported basis, including one-time items, earnings per share came in at $2.88 compared with $3.10 recorded in 2018. Sales came in at $5.37 billion in 2019 compared with the previous year’s $5.39 billion. The top-line figure also missed the Zacks Consensus Estimate of $5.40 billion.

Guidance

For 2020, Sonoco expects adjusted earnings per share guidance of $3.60-$3.70 compared with the prior estimate of $3.65-$3.75. Operating cash flow is expected between $625 million and $645 million, and free cash flow is projected at $250-$270 million. For the ongoing quarter, the company projects adjusted earnings per share of 83-89 cents compared with the year-ago quarter’s 85 cents.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months.

VGM Scores

Currently, Sonoco has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. 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.