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How Did Sonoco Products’ Stock React to the Rating Downgrade?

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Bank of America Merrill Lynch downgrades Sonoco Products

Sonoco Products (SON) has a market cap of $4.9 billion. On Friday, March 18, Bank of America Merrill Lynch downgraded Sonoco Products’ rating from “buy” to “neutral.” SON fell by 1.4% to close at $48.21 per share on the day. The stock’s price movements on weekly, monthly, and YTD (year-to-date) bases are 2.9%, 15.1%, and 18.9%, respectively.

Currently, SON is trading 7.2% above its 20-day moving average, 16.6% above its 50-day moving average, and 17.6% above its 200-day moving average.

The PowerShares S&P MidCap Low Volatility Portfolio (XMLV) invests 1.4% of its holdings in Sonoco Products. The ETF tracks a volatility-weighted index of the 80 least volatile stocks from the S&P MidCap 400 Index. XMLV has risen 5.2% YTD, as of March 17, 2016.

The market caps of Sonoco Products’ competitors are as follows:

  • WestRock Company (WRK): $10.0 billion
  • AptarGroup (ATR): $4.8 billion
  • Bemis Company (BMS): $4.9 billion
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Performance of Sonoco Products in 4Q15 and 2015

Sonoco Products reported 4Q15 net sales of $1,267.1 million, a fall of 3.8% compared to net sales of $1,316.8 million in 4Q14. Sales of the consumer packaging and protective solutions segments rose by 0.99% and 2.8%, respectively, and sales of the display & packaging and paper & industrial converted products segments fell by 8.0% and 9.5%, respectively, in 4Q15 compared to 4Q14.

The company’s net income and EPS (earnings per share) rose to $56.1 million and $0.55, respectively, in 4Q15, compared to $49.0 million and $0.48, respectively, in 4Q14.

Sonoco Products’ 2015 earnings

In 2015, SON reported net sales of $4,964.4 million, a fall of 1.0% year-over-year. Its net income and EPS rose to $250.1 million and $2.44, respectively, in 2015, compared to $225.9 million and $2.19, respectively, in 2014.

Meanwhile, the company’s cash and cash equivalents rose by 13.2%, and its inventories fell by 8.3% in 2015. Its current ratio and long-term debt-to-equity ratio fell to 1.4 and 0.66, respectively, in 2015, compared to 1.5 and 0.80, respectively, in 2014.

The company has declared a quarterly dividend of $0.35 per share on its common stock. The dividend was paid on March 10, 2016, to shareholders of record at the close of trade on February 24, 2016.

The price-to-earnings and price-to-book value ratios of Sonoco Products are 19.8x and 3.2x, respectively, as of March 18, 2016.

Projections for fiscal 2016 and fiscal 1Q16

The company has made the following projections for fiscal 2016:

  • EPS in the range of $2.64–$2.74
  • Free cash flow of ~$140 million

Sonoco Products has approved a share repurchase up to $100 million of its common stock in open market transactions. It has also restored its residual share repurchase authorization to the original figure of 5 million shares. The company expects 1Q16 EPS to be in the range of $0.57–$0.62.

In the next part of this series, we’ll take a look at Silgan Holdings.

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