EUR 850.00 For Business Accounts Only

Morningstar | Sonoco's Updated 20/20 Vision Doesn't Change Our No-Moat Perspective on Long-Term Margins. See Updated Analyst Note from 17 Dec 2018

Following updated guidance for both 2018 and 2019, along with added details on Sonoco's strategy, we've adjusted our forecasts to incorporate the increased guidance, the relatively small Conitex acquisition, and the time value of money. As a result, our fair value estimate rises slightly to $42 from $41, and our no-moat rating is unchanged. In our view, Sonoco's trading price around $55 per share embeds expectations of far higher growth and profitability than we think are reasonable for the industries it operates in. Accordingly, we believe view shares as considerably overvalued.

Although we've increased our near-term outlook for Sonoco to incorporate a higher than expected insurance payout and lower capital spending, our long-term perspective on the firm remains unchanged. We believe some of Sonoco's packaging solutions are capable of driving excess returns on invested capital, but not enough to establish a narrow- or wide-moat rating. Accordingly, we think many of management's stated goals of improving sales excellence, operational excellence, and simplifying its reporting structure are merely par for the course. These restructuring and improvement efforts are common among packaging players, and are generally necessary just to hold their ground on profitability.

The largest factor that we forecast to weigh on profitability is increased capacity in paper products, leading to lower prices and margins across the industry. The impact will be limited to Sonoco's paper and industrial converted segment, which has been supported by high margins on corrugating medium production. As segment profitability falls, so too will consolidated operating profit margins.

More broadly, we think Sonoco's goal of achieving 2% organic growth annually through 2020 is achievable through a mix of some price movement and modest volume gains. We're slightly more skeptical of management's goal to augment organic growth with the acquisition of $1 billion in sales over the same time period. For context, management's target represents just under 20% of 2018 sales. By setting out explicit goals that management may feel compelled to meet, this strategy has the potential to destroy value if Sonoco overpays for growth. However, we currently make no explicit forecasts associated with Sonoco's acquisition strategy, and will evaluate each deal individually when one is announced.