Sonoco Products reported generally disappointing first-quarter results. Following a difficult 2012, in which base earnings per share ended 7% below the midpoint of management’s initial full-year guidance, we expected the company to easily outperform its conservative 2013 outlook. That, however, may not be the case. Though Sonoco did raise its full-year free cash flow projection to $150 million from $130 million, it also trimmed the top end of its base EPS guidance to $2.32 from $2.34. We have reduced our full-year EPS estimate to $2.29, but are maintaining our fair value estimate of $33 per share and do not expect to make any changes to our current no-moat rating on Sonoco.
With the exception of Sonoco’s relatively small, but promising Protective Solutions business, each segment’s operating margin contracted on a year-over-year basis and group volumes fell 2% over the same period. Consumer packaging was a particularly poor performer this quarter as sales declined 6.5% and EBIT margins contracted to 9.1% from 10.1%.
Analysts continue to think that this segment faces an uphill battle against intense competition and tepid consumer spending in developed markets. In the past, Sonoco could rely on steady sales and profit margins from its rigid paper packaging operations, but trends in developed market consumer packaging have shifted toward lowermargin plastic packaging alternatives that do not play to Sonoco’s advantages.
There were a few bright points in the quarter. First, while Sonoco’s tubes and cores business is far from being in full recovery mode, it continues to build traction. North American T&C volumes, for instance, were up 2.7% on a tons/day basis compared to the first quarter of 2012; Europe T&C volumes were lower by 0.2% on a tons/day basis, but are holding up relatively well against a still-weak European economic backdrop.
Second, Sonoco did win back some business from Energizer, which was a former Tegrant client that departed before Sonoco’s acquisition of the protective packaging company. Finally, Sonoco marked its 31st year of consecutive dividend increases and its 352nd consecutive quarterly dividend by increasing its payout by 3.5%.
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