Sonoco Results Driven by Higher Pricing and Demand

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Sonoco Products announced solid third-quarter results on Thursday, driven primarily by higher overall pricing and improving demand in the Paper & Industrial Converted Products and Display Packaging segments. Management increased its full-year free cash flow (excluding dividend payments of about $129 million) target to $190 million from $150 million and tightened full-year guidance to $2.27-$2.32 per share from $2.26-$2.32 per share; we expect to leave our full-year estimate of $2.29 per share unchanged. The improved free cash flow outlook is due to better working capital management and lower-than-expected cash taxes. After reviewing these results, we are maintaining our current $36 per share fair value estimate and our no-moat rating for Sonoco.

The headline of our note published on Feb. 14 was “Sonoco’s Tubes and Cores Business is Primed to Prosper in 2013,” and through the first nine months of the year, this has proved to be the case. As one of Sonoco’s two most competitively advantaged products, we’re pleased to see steady tube and core volume growth in the important North America and Europe regions.

Some of the volume gains come from market share gains, but it’s also from improving demand from cyclical end markets like textiles and films. Looking into 2014, we expect tubes and cores to remain a positive contributor to Sonoco’s results. Sonoco’s other advantaged product line, composite cans used in consumer packaging, remains stuck in neutral with flat year-over-year unit volumes. We forecast secular headwinds for composite cans in developed markets offset by steady growth in Southeast Asia and Eastern Europe.

Though the Display & Packaging segment only accounts for 11.6% of group sales, its 210 basis point EBIT margin improvement was impressive. Most of the gains this quarter can be attributed to new Energizer business, but we expect the positive momentum to continue into 2014 with steady demand and higher margins than we’ve seen in recent years.

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