Why Did Sonoco Increase Prices for Paperboard Tubes and Cores?

Sonoco Products (SON) has a market cap of $5.3 billion. It fell 0.70% to close at $52.52 per share on September 26. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were 0.52%, 1.5%, and 31.5%, respectively, on the same day. SON is trading 0.78% above its 20-day moving average, 2.1% above its 50-day moving average, and 13.9% above its 200-day moving average.

The PowerShares S&P Mid-Cap Low Volatility Portfolio (XMLV) invests 1.3% of its holdings in Sonoco. The ETF tracks a volatility-weighted index of the 80 least volatile S&P Mid-Cap 400 companies. The YTD price movement of XMLV was 15.5% on September 26.

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

• WestRock Company (WRK) — $12.0 billion
• AptarGroup (ATR) — $4.9 billion
• Bemis Company (BMS) — $4.8 billion

In a press release on September 26, Sonoco reported, “Sonoco (SON) today announced it will raise the price for all paperboard tubes and cores by 6 percent to 10 percent, effective with shipments in the United States and Canada, beginning October 24, 2016.”

According to James Harrell, Sonoco’s North America Tubes and Cores Division’s vice president, “This price increase, our first in more than a year, is necessary due to the recent increase in costs for uncoated recycled paperboard, our primary raw material, combined with price escalations in energy, labor and other input costs.”

Sonoco Products reported fiscal 2Q16 net sales of ~$1.2 billion, a fall of 3.4% from net sales of ~$1.3 billion in fiscal 2Q15. Sales from its Consumer Packaging, Display & Packaging, and Paper & Industrial Converted Products segments fell 3.8%, 7.6%, and 3.5%, respectively.

Sales from its Protective Solutions segment rose 2.8% from fiscal 2Q15 to fiscal 2Q16. The company’s gross profit margin rose 4.3%, and its income before interest and taxes fell 7.0%. Its net income and EPS (earnings per share) fell to $56.3 million and $0.55, respectively, in fiscal 2Q16 compared to $64.4 million and $0.63, respectively, in fiscal 2Q15.

Sonoco’s cash and cash equivalents fell 41.0%, and its inventories rose 3.1% from fiscal 4Q15 to fiscal 2Q16. Its current ratio rose to 1.5x, and its long-term debt-to-equity ratio fell to 0.65x in fiscal 2Q16 compared to 1.4x and 0.7x, respectively, in fiscal 4Q15. It reported free cash flow of $31.9 million in fiscal 2Q16, a fall of 0.93% from fiscal 2Q15.

Sonoco Products has projected EPS of $0.65–$0.70 for fiscal 3Q16. The company made the following projections for fiscal 2016:

• EPS of $2.68–$2.74
• effective tax rate of 31.5%
• free cash flow of ~$140 million, which reflects an operating cash flow of $490 million

In the next part of this series, we’ll take a look at ConAgra Foods (CAG).