SSCC Smurfit-Stone Container Corp. Common Stock

Sonoco Products Co. (SON) registered its strongest first quarter results delivering an EPS of 56 cents in the quarter up 17% from 48 cents in the prior year quarter, but missing the Zacks Consensus Estimate by a penny.

Included in the results were 2 cents pertaining to restructuring expenses and a gain of a cent from other adjustments; excluding these, adjusted EPS amounted to 57 cents versus 50 cents in the prior-year quarter.

Earnings improved during the quarter, mainly due to volume growth along with six additional days in the quarter. Besides, manufacturing productivity improvement, earnings from acquisitions, lower pension costs and favorable price/cost relationship were partially offset by higher labor, freight and energy expenses.

Net sales as reported by the company during the quarter amounted to $1,117.3 million versus $935.1 million in the year-earlier quarter, striding ahead of the Zacks Consensus Estimate of $1,021 million. Net sales improved due to a longer quarter; higher selling prices, realized mainly from Tubes and Cores/Paper segment; other volume gains; acquisitions and the positive impact from foreign currency translation.

Cost and Margins

Cost of sales as reported by the company increased to $923.1 million from $759.4 million in the year-ago quarter. Gross profit increased to $194.2 million from $175.8 million in the prior-year quarter. However, gross margin declined 140 basis points year over year to 17.4% in the quarter.

Selling, general and administrative expenses increased to $102.3 million from $96.1 million in the year-ago quarter. Operating income increased to $89.6 million from $75.7 million in the year-earlier quarter, but this did not affect operating margin, which remained at 8% in the reported quarter.

Segmental Performance

Consumer Packaging: first quarter sales amounted to $459 million compared with $382 million in the year-earlier quarter. Operating profit of $45.9 million was up slightly from $45.7 million in the year-ago quarter.

The improvement in sales was due to last year’s acquisition of Associated Packaging Technologies Inc. (APT), a leading thermoform tray manufacturer for the frozen food industry, besides higher selling prices, favorable currency translation and a longer quarter. Operating profit improved due to decreased pension cost and the impact of the longer quarter, which were offset by higher labor and freight costs.

Tubes and Cores/Paper: Sales as reported by the segment were $444 million versus $370 million in the year-earlier quarter, which improved mainly due to higher selling prices, improved volume of industrial converted products and recycled materials, favorable currency translation and the longer quarter.

Operating profit of the segment increased to $28.6 million from $21.5 million in the prior-year quarter. The increase is attributable to the positive price/cost relationship, longer quarter, decreased pension costs and productivity improvements which were mitigated by higher energy and freight costs, along with the negative impacts of mechanical and weather-related downtime in certain global paper operations.

Packaging Services: Sales as reported by the segment were $121 million, an improvement from $112 million in the prior-year quarter. The surge was mainly due to increased volume in contract packaging and point of purchase displays, favorable foreign exchange and longer quarter.

Operating profit for the segment amounted to $6.1 million up from $5.1 million in the year ago-quarter.

All other Sonoco: Sales in this segment amounted to $93 million, up from $72 million in the year-earlier quarter. The volume gains in molded plastics and reels and spools, along with higher selling prices, sales from a small acquisition and the longer quarter account for the increase in segment sales.

Operating profit of the segment was $10.5 million versus $7.4 million in the year-ago quarter. As a result of improved volumes and productivity gains, operating profit increased 42% on the year-over-year basis, partially mitigated by negative price/cost relationship and higher labor, energy and freight.

Financial Position

Cash and cash equivalent amounted to $185.2 million as of April 3, 2011 versus $158.2 million as of December 31, 2010.

Cash from operating activities was an outflow of $13.8 million in the quarter versus an inflow of $73.8 million in the year-ago quarter. The outflow indicates the company’s contribution of $85 million toward the company’s U.S. Pension plans.

Capital expenditure was $38.3 million versus $28.5 million in the year-ago quarter, while dividends amounted to $28.1 million compared with $27.1 million in the prior-year quarter.

The company also repurchased 1,305,000 shares of common stock for approximately $46.3 million at an average price of $35.50, completing a previously announced program to repurchase up to 2 million shares.

The company’s debt-to-total-capital ratio was 33.1%, compared with 29.2% at the end of 2010.

Outlook

Sonoco now expects second quarter earnings in the range of 61 cents to 65 cents and for full year, earnings are projected in the range of $2.52 to $2.60. The guidance also reflects the effective tax rate of 31% for the full year.

Management believes that there will not be much change in the level of sales except for seasonality and expects better second quarter results due to stronger productivity, particularly in the Tubes and Cores/Paper segment, as a result of less operating downtime in the company’s mill system, improving price/cost relationship and cost controls.

Our Take

We believe Sonoco’s strategy to grow through acquisitions, potential restructurings and an increased focus on emerging markets will certainly bring long-term benefits to the company. However, raw material inflation, high customer concentration and a still fragile construction industry will affect its financial results in the near term. We currently have a Zacks #4 Rank (short-term Sell recommendation) on the stock.

Hartsville, South Carolina-based Sonoco is a global manufacturer of consumer and industrial packaging products. The company has more than 300 operations in 35 countries throughout North and South America, Europe, Australia and Asia.

It operates through four reportable segments: Tubes and Cores/Paper, Consumer Packaging, Packaging Services and All Other Sonoco segment. Sonoco competes with Bemis Company Inc. (BMS) and Smurfit-Stone Container Corp. (SSCC).

 
BEMIS (BMS): Free Stock Analysis Report
 
SONOCO PRODUCTS (SON): Free Stock Analysis Report
 
SMURFIT-STN NEW (SSCC): Free Stock Analysis Report
 
Zacks Investment Research