Sonoco’s (NYSE: SON) Operational Chops Give Shares Solid Long-Term Upside

Sonoco Products NYSE: SON, which manufactures and sells industrial and consumer packaging products, has managed its business exceptionally well throughout the pandemic and looks set to thrive in a post-COVID world.

Here’s an overview on recent performance:

In Q2 2020, Sonoco’s net sales were $1.245 billion, down around 8% yoy. Its base earnings of $0.79 per share was down from the $0.95 a share recorded in Q2 2019.

Sonoco operates through four segments: Consumer Packaging, Display and Packaging, Paper and Industrial Converted Products, and Protective Solutions.

Performance varied widely across the segments in Q2, with COVID-19 playing a major role in the results. The virus mostly negatively impacted numbers, with few exceptions.

Fortunately for Sonoco, the struggles appear to be short-term. And once the company’s sales numbers do improve, its operational efficiency will quickly make shares look cheap at current levels.

Let’s start by looking at each segment.

Consumer Packaging Was a Bright Spot

In the Consumer Packaging segment, sales were up 2% yoy. With 80% of this segment’s revenue related to food products, sales benefited from consumers going to restaurants less and eating at home more. Rigid paper containers enjoyed a record quarter, with volumes up 8% globally.

While grocery goods have seen surging sales since the onset of the pandemic, this seems like more of a short-term boost for Sonoco than a sustainable long-term trend. Once the pandemic ends, people will eat out at the same frequency as before.

Retail Store Closures Negatively Impacted Display and Packaging

In Display and Packaging, Sonoco sales were down by 20% yoy.

Sonoco attributed much of the drop to the forced shutdown of many retail stores during the quarter.

On the plus side, operating profit in this segment actually increased yoy, as Sonoco saw the slow down coming, and quickly cut costs.

That said, these businesses are unlikely to return to pre-pandemic levels in the foreseeable future, so Sonoco may have a few more weak quarters ahead in this segment.

Paper and Industrial Products Has Unclear Future

Paper and Industrial Products saw sales volumes decrease by around 10% yoy.

CEO Howard Coker said, “We saw sales volume growth in the lightweight board which serves tissue and towel markets which were up 14% during the quarter, but this was more than offset by declines in heavyweight board serving our industrial converted markets.”

The path to recovery is a bit unclear in this segment, so you should err on the side of caution with estimates.

Protective Solutions Was the Hardest-Hit, But Should Recover Quickly

Sonoco saw sales volume dip 30% yoy here due to:

• Weak demand for the company’s molded foam automotive products.
• Lower volumes in the ThermoSafe business as drug shipments to medical clinics and doctors’ offices dropped due to the postponement of treatments unrelated to COVID-19.

There is growing optimism for a rebound in the automotive industry in the second half of 2020, as people are getting back on the roads in droves.

And regarding drug shipment trends, they should return to normal sooner than later, as few treatments can be postponed by more than a few months.

Sonoco Showed Its Operational Chops in Q2

Despite the 8% dip in overall net sales for Sonoco, both gross profit and operating profit held up pretty well:

• Gross profit was $248 million, down $27 million yoy. But gross profit margin was down just 30 basis points to 19.9%.
• Operating profit was $127 million, down $18 million yoy. But operating margin dropped just 50 basis points to 10.2%

Lower SG&A expenses helped prevent operating profit from decreasing more, as that expense was  $121 million – $10 million lower than Q2 2019. Sonoco noted that it was able to reduce travel and employee medical costs during the quarter, partially due to the pandemic.

Over the past three years, Sonoco has grown revenue at a CAGR of around 3% but has grown operating income (EBIT) at a CAGR of nearly 10%. While operating income can only outpace revenue growth for so long, it shows the company is well-run.

With shares trading at around 17x projected 2020 earnings and around 16x projected 2021 earnings, Sonoco looks like a solid value at current levels if you assume it will return to modest growth in 2021 and beyond.

Sonoco Products NYSE: SON is On The Verge of a Breakout

After basing between around $48 and $55 for the past two-and-a-half months, SON looks ready to breakout.

Shares are currently at the high end of that range, and the 50-day moving average should cross over the 200-day moving average in the next couple of days, which would be a technical tailwind.

If SON decisively breaks out above $56, you can look to get in. And with the 50-day and 200-day moving averages less than $4 a share below that level, you would have a clear line in the sand for your stop-order.

The Final Word

Sonoco is one of the safest plays in a frothy market. As a whole, the company is holding up relatively well during the pandemic. And once the pandemic ends, the company could easily return to modest growth rates – which would make shares look like a bargain at current levels.