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Expense Control & Investments Aid Sonoco (SON) Amid Cost Woes

Sonoco Products Company SON has been gaining from its Metal Packaging acquisition, and strong recovery in price despite raw material, energy and freight cost pressures, and supply-chain challenges.

Stable consumer demand and productivity initiatives are boosting the company's results. The company’s ongoing focus on increasing investment in its core consumer and industrial businesses will further aid growth.

Shares of this Zacks Rank #3 (Hold) company have gained 3.3% in a year against the industry’s fall of 12.8%.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

Strategic Actions to Boost Growth

Sonoco’s consumer packaging businesses have been benefiting from the Metal Packaging acquisition and pricing efforts. The company is implementing aggressive price actions across its businesses to counter higher raw material and non-material inflation.

Continued strong recovery in price and costs across most of its businesses, benefits from the Ball Metalpack (now Sonoco Metal Packaging) acquisition, and solid demand are likely to contribute to the 2023 results.

Sonoco’s focus on optimizing businesses through productivity improvement, standardization and cost control will also aid its results in the near term. It is implementing several synergy opportunities, including optimizing raw material purchases, leveraging indirect expenses, and coordinating supply-chain logistics.

These factors will help meet Sonoco’s cost-saving target.

Focus on Growth & Innovation to Aid Results

Sonoco is focused on increasing investment in its core consumer and industrial businesses, and expects to achieve an annual EBITDA of $1 billion by 2026.

The company emphasizes capital allocation and expects to be able to increase dividends, while maintaining an investment-grade balance sheet. It intends to increase returns on invested capital in the coming years through organic investments in core accretive acquisitions and portfolio rationalization.

Moreover, Sonoco is focused on growing in niche food markets and launching products with new customers. Investment in these markets will add pouch-making capacity for the company and help it expand its presence in the pouch market.

Acquisitions Bode Well

On Jan 22, 2022, Sonoco completed the acquisition of Ball Metalpack for a cash payment of $1.35 billion. Ball Metalpack is a foremost producer of sustainable metal packaging for food and household products and the largest manufacturer of aerosol products in North America.

The deal supports Sonoco’s focus on investing in the core business that strengthens its global Paper Cans and Closures business, while bolstering its sustainable packaging portfolio with metal packaging.

Sonoco expects to realize tax benefits of $180 million from the deal. It expects to generate annual synergies of at least $20 million from procurement and SG&A savings within three years of the transaction.

In fourth-quarter 2022, Sonoco acquired Denmark-based Skjern, a privately owned manufacturer of paper, for $88 million in cash. The acquisition expands SON’s production capacity and help it capitalize on the growing market for sustainable paper and packaging products in Europe.

High Costs & Supply Issues Continue to Hurt Margins

Sonoco will continue to bear the brunt of raw material, energy and freight cost pressures, and the impacts of supply-chain disruptions. Sonoco’s bottom line is impacted by unfavorable foreign currency translation and divestitures.

These are likely to persist and dent the company’s results in the upcoming quarters. Elevated interest expenses will also impact its margins.

Stocks to Consider

Some better-ranked stocks from the Industrial Products sector are Hubbell Incorporated HUBB, The Manitowoc Company, Inc. MTW and Pentair plc PNR. HUBB and MTW flaunt a Zacks Rank #1 (Strong Buy) at present, and PNR has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Hubbell has an average trailing four-quarter earnings surprise of 21%. The Zacks Consensus Estimate for HUBB’s fiscal 2023 earnings is pegged at $13.81 per share. The consensus estimate for 2023 earnings has moved north by 22.5% in the past 60 days. Its shares gained 45.4% in the last year.

Manitowoc has an average trailing four-quarter earnings surprise of 38.8%. The Zacks Consensus Estimate for MTW’s 2023 earnings is pegged at 85 cents per share. The consensus estimate for 2023 earnings has moved 63.5% north in the past 60 days. MTW’s shares gained 18.6% in the last year.

The Zacks Consensus Estimate for Pentair’s 2023 earnings per share is pegged at $3.66, up 3% in the past 60 days. It has a trailing four-quarter average earnings surprise of 7.2%. PNR gained 14.9% in the last year.

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