Morningstar | Softness in Sonoco's Consumer Segment Offset by Rebound in Display Margins; Shares Remain Overvalued
Sonoco's 2018 consolidated sales of $5.39 million and adjusted operating income of $492 million were essentially in line with our expectations for the year. However, the consumer segment saw margin compression in the fourth quarter, offset by better-than-expected performance in Sonoco's relatively small Display and Packaging business. Heading into 2019, largely driven by acquisitions, we expect sales to grow roughly 5% and adjusted operating income to rise slightly more than 6%. With our forecasts little changed, our $42 fair value estimate remains intact along with our no-moat rating. With shares trading roughly 50% above our fair value estimate, we think the market has unrealistic expectations of future margin expansion opportunities.The largest surprise in the fourth quarter was significantly weaker consumer segment profits than we originally anticipated. A decrease in volumes, along with higher input and freight costs, drove a severe contraction in operating margins in the quarter. Management has decided to close a facility belonging to one of its recently acquired companies to restore operating leverage. Based on recent order volumes, management believes operating margins should recover to between 10.0%-10.5% in 2019. Assuming ongoing weak profitability doesn't prevail in the first quarter, we think the recovery is feasible. Over the long run, we expect margins to remain fairly flat, reflecting Sonoco's limited pricing power versus its massive consumer packaged goods customers.
In Sonoco's smallest segment, Display and Packaging, operating margin rose to 6%, a substantial improvement after nearly two years of hardly making a profit. While we expected the closure of a continually troublesome pack center to improve profit margins, we underestimated the magnitude of the change. We've revised our segment operating margin forecasts upward, to a range of 4.0%-4.5% over the coming years to better reflect its underlying profitability.
Sonoco Products is a manufacturer of industrial and consumer packaging products and a provider of packaging services. The company's segments are: Consumer Packaging, which includes round composite cans, shaped rigid paperboard containers, fiber and plastic caulk/adhesive tubes, aluminum, steel and peelable membrane easy-open closures for composite and metal cans; Paper and Industrial Converted Products, which include recycled paperboard, chipboard, tubeboard, lightweight corestock, boxboard, linerboard, corrugating medium, edgeboard, paper grades, and adhesives; Display and Packaging, which include point-of-purchase displays; and Protective Solutions, which include packaging and components.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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