Morningstar | Sonoco's Shares Remain Overvalued Following Lackluster Second Quarter; Maintaining $42 FVE. See Updated Analyst Note from 18 Jul 2019
Following its release of soft second-quarter results, Sonoco's shares sold off more than 3% to just under $62 per share. However, the company's performance had no material impact on our long-term outlook. Accordingly, our $42 per share fair value estimate and no-moat rating remain in place. With shares trading considerably above our estimate of intrinsic value, we would caution investors that the stock has considerable downside risk. In particular, we caution that Sonoco may be less recession-resistant than the current share price seems to imply. For example, in 2009, sales fell by nearly 13% and operating income fell by roughly 20% versus the year prior, declines not especially reflective of a defensive business.Quarterly results were soft, with portions of each segment facing volume weakness. Consolidated sales fell to $1.36 billion from the prior year period and adjusted earnings rose 3% to $96.5 million. In Consumer Packaging, volumes declined across most markets, with management highlighting a general retraction in consumer demand. Sales fell by 2% year on year to $603 million, and operating profit fell to $62.9 million, down just over 1%. The segment's broad exposure to consumer packaging closely ties its fate to consumer spending. We haven't materially adjusted our outlook for the year in this segment, given that North American consumers still appear to be on steady ground and no economic disruptions appear imminent.
The Paper and Industrial segment performed worse than headline figures might suggest. Sales rose 3.6% year on year with operating margins roughly flat. Management noted that demand for its paper and corrugated products was broadly weak. This is unsurprising given the slack we're observing across containerboard markets. We maintain our view that margins will contract further as lower operating rates throughout the corrugated space lead to price pressure.
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.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.