Sonoco Hits New 52-Week High on Favorable Ruling - Analyst Blog

Shares of Sonoco Products Co. SON, a global manufacturer of consumer and industrial packaging products, reached a new 52-week high of $44.00 on Jun 24. Sonoco has a market cap of $4.42 billion. Average volume of shares traded over the last 3 months stood at approximately 428K.

The company has delivered a 1-year return of about 30.97%, outperforming the S&P 500. Sonoco has long-term estimated earnings per share growth rate of 6.93%.

What's Driving Sonoco Up?

Sonoco's shares have trended upward following its first-quarter earnings release on Apr 17. Adjusted earnings per share for Sonoco Products increased 4% to 50 cents in the quarter. A positive price/cost relationship, modest productivity improvements and lower pension and interest expenses helped offset lost production and lower sales due to severe winter weather across the U.S. and Canada.

For full-year 2014, Sonoco reiterated its earnings per share guidance range of $2.43 to $2.53. Free cash flow is anticipated to be around $130 million for 2014. Sonoco expects second-quarter 2014 earnings per share in the range of 63–67 cents. Compared with 59 cents earned in the prior-year quarter, this reflects annual growth of 7% to 14%.

After having a difficult run following the recession, the Display and Packaging segment's sales and profit improved in 2013 and the momentum has continued in the first quarter of 2014 as well. This is driven by volume increases in both international contract packaging and the U.S. display and packaging services. Furthermore, the new contract from Energizer Holdings Inc. ENR, awarded in April, also supported results.

The annual $20 million Energizer contract is a major win for Sonoco, as it will leverage its segments in supplying e-packaging materials and will also provide packaging services. Sonoco foresees opportunity for other similar contract wins going forward. Furthermore, the pickup in promotional activity at the customer level signals an increased volume outlook for packaging goods.

The severe winter weather in January and February significantly disrupted Sonoco's operations as well as its customers'. However, with the weather improving, the company noted a significant rebound in demand followed by a return to a more normal and expected level of sales orders in March. Although overall volume was essentially flat, second-quarter earnings benefited from a 50 basis point increase in the company's overall gross margin due to a positive price/cost relationship.

On Jun 13, Sonoco's subsidiary, Sonoco-Alcore S.a.r.l., announced that the German Federal Court of Justice has rejected an appeal against the German portion of Sonoco's European Patent EP 1 071 556, thereby entirely reversing a decision of the Federal Patent Court of Mar 1, 2011. The patent relates to the use of wide-ply board technology in the production of cores for the paper industry as used in Sonoco's M-Core Series.

Per the decision, which is final and cannot be appealed, the patent is confirmed to have constantly been in force since it was granted in 2002. In other countries, the validity of the European patent has not been challenged to date. An opposition against the patent before the European Patent Office had been rejected in 2009.

The combination of the wide-ply in-house manufactured coreboard and Sonoco Alcore's proprietary manufacturing technique give the M-Series Cores superior performance characteristics to meet the rising demands of the paper industry.

Other Stocks to Consider

Sonoco currently retains a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Crown Holdings Inc. CCK and Graphic Packaging Holding Company GPK, both of which hold a Zacks Rank #2 (Buy).