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Here's Why You Should Hold On to Sonoco (SON) Stock Now

Sonoco Products Company SON is gaining from forecast-topping fourth-quarter 2020 results and robust demand for the consumer packaging business. Moreover, a focus on productivity improvement and cost-control initiatives will drive growth. However, higher recovered paper, freight and other operating costs might dent its margins.

Sonoco currently carries a Zacks Rank #3 (Hold). It has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings & Sales Beat the Consensus Mark in Q4

Sonoco reported adjusted earnings of 82 cents in fourth-quarter 2020, surpassing the Zacks Consensus Estimate of 77 cents as well as management’s guidance of 70-80 cents. Moreover, the bottom line improved 9% year over year on solid productivity improvements, higher volumes and contributions from acquisitions. Revenues of $1.38 billion also beat the Zacks Consensus Estimate of $1.31 billion and increased 3% year on year.

Positive Earnings Surprise History

Sonoco has a trailing four-quarter average earnings surprise of 6.46%. The company has an estimated long-term earnings growth rate of 5%.

Valuation is Inexpensive

The trailing 12-month EV/EBITDA ratio is 9.1 for the company, while the industry's average trailing 12-month EV/EBITDA ratio is 22.4.

Superior Return on Assets

Sonoco currently has a Return on Assets (ROA) of 6.3%, higher than the industry’s 5.2%. An above-average ROA denotes that the company is generating earnings by effectively managing its assets.

Positive Growth Projections

The Zacks Consensus Estimate for 2021 earnings is currently pegged at $3.54, indicating year-over-year growth of 3.81%. The same for 2022 is pinned at $3.79, suggesting year-over-year improvement of 7%.

Growth Drivers in Place

Sonoco’s Consumer Packaging segment will continue to perform well in the current year as sales from food packaging keep benefiting from at-home eating habits amid the pandemic. Notably, 80% of the segment’s sales come in from food packaging. Moreover, demand in the Industrial Paper Packaging segment’s served markets continues to show sequential improvement. Paperboard operations in North America are gaining from elevated demand for the tissue and towel markets.

The Protective Solutions segment is likely to witness higher demand in the pharmaceutical and appliance-served markets during the March-end quarter. The ThermoSafe temperature-assured packaging business is anticipated to gain from a strong flu vaccine season and solid demand from its base pharmaceutical and food customers during the ongoing quarter. Considering these factors, Sonoco projects adjusted earnings per share between $3.40 and $3.60 for 2021, indicating year-over-year growth of 3% at the midpoint. Management also expects sales volume improvement across all segments.

The company is focused on driving growth and margin expansion and generating solid free cash flow. Sonoco’s balance-sheet strength and availability of substantial liquidity in the form of cash and revolving credit facilities will stoke growth. Moreover, Sonoco’s focus on optimizing businesses through productivity improvement, standardization and cost control will aid its performance in the near term.

Few Headwinds to Counter

Sonoco expects the divestiture of display and packaging unit in Europe to unfavorably impact its bottom-line results in the first quarter. The Paper and Industrial Converted Products segment will be affected by a negative price/cost relationship during the current quarter due to year-over-year higher recovered paper, freight and other operating costs.  Moreover, higher Old Corrugated Containers (OCC) price might erode the company’s margins.

Price Performance

Shares of Sonoco have gained 51.6% over the past year compared with the industry's growth of 74.8%.

Stocks to Consider

Better-ranked stocks in the Industrial Products sector are Deere & Company DE, AGCO Corporation AGCO and Dover Corporation DOV, each carrying a Zacks Rank #2.

Deere & Company has a projected earnings growth rate of 82.5% for fiscal 2021. Over the past year, the company’s shares have appreciated 133.2%.

AGCO Corporation has an estimated earnings growth rate of 29.9% for the ongoing year. The company’s shares have surged 134.1% in the past year.

Dover has an expected earnings growth rate of 13.7% for 2021. The stock has gained 38.7% in a year’s time.

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