SON Stock Study (9-14-23)

Posted by Mark on November 17, 2023 at 06:57 | Last modified: September 15, 2023 14:53

I recently did a stock study on Sonoco Products Co. (SON) with a closing price of $54.34.

M* writes:

     > Over its 100-year-plus history, Sonoco Products has steadily assembled
     > a diverse portfolio of industrial and consumer packaging product
     > offerings such as flexible and rigid plastics, reels and spools,
     > pallets, and composite cans. The company serves a variety of
     > consumer and industrial end markets throughout North America. Sonoco
     > has raised its dividend each year for more than 30 years.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 3.1% and 5.8%, respectively. I have excluded ’21 EPS because, from the company’s 2021 10-K:

     > The full-year 2021 GAAP loss per diluted share was $(0.86)… The
     > full-year 2021 GAAP loss was driven by $410.4 million after-tax
     > pension settlement charges mostly related to the Company’s
     > settlement of its U.S. Inactive Plan in the second quarter.

Lines are up, jagged, and somewhat parallel. Sales [EPS] declines in ’15, ’16, and ’19 [’17, ’19, and ’20]. PTPM trails peer averages and the industry despite increasing from 6.3% in ’13 to 7.9% in ’22 with a last-5-year mean of 6.7% (’21 excluded).

Also over the past decade, ROE trails peer and industry averages despite increasing from 13.7% (’13) to 27.9% (’22) with a last-5-year mean of 16.9% (’21 excluded). Debt-to-Capital is less than peer and industry averages despite trending up from 36.5% (’13) to 62.7% (’22) with a last-5-year mean of 51.9%.

Interest Coverage is 5.7 and Quick Ratio is 0.9. M* rates the company “Standard” for Capital Allocation and describes its balance sheet as “sound.” Value Line gives an A rating for Financial Strength.

And remember: Sonoco is a Dividend Champion!

With regard to sales growth:

• CNN Business projects flat YOY and 2.0% growth per year for ’23 and ’22-’24 (based on 5 analysts).
• YF projects YOY 5.3% contraction and 4.0% growth for ’23 and ’24, respectively (6 analysts).
• Zacks projects YOY 6.0% contraction and 3.9% growth for ’23 and ’24, respectively (2).
• Value Line projects 3.8% annualized growth from ’22-’27.
• CFRA projects contraction of 4.8% YOY and 4.7% growth per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 1.0% annualized growth and projects 1.9%/year for the next five years (analyst note).

I am forecasting near the lower of two long-term estimates at 2.0% per year.

With regard to EPS growth:

• CNN Business projects contraction of 12.2% YOY and 4.6% per year for ’23 and ’22-’24, respectively (based on 5 analysts), along with 5-year annualized growth of 4.0%.
• MarketWatch projects annualized contraction of 7.0% and 2.8% for ’22-’24 and ’22-’25 (8 analysts).
• Nasdaq.com projects growth of 6.2% YOY and 5.2% per year for ’24 and ’23-’25 [3/3/1 analyst(s) for ’23/’24/’25].
• Seeking Alpha projects 4-year annualized growth of 4.0%.
• YF projects YOY 19.1% contraction and 4.6% growth for ’23 and ’24, respectively (6), along with 5-year annualized contraction of 1.4%.
• Zacks projects YOY 19.8% contraction and 6.2% growth for ’23 and ’24, respectively (3), along with 5-year annualized growth of 5.0%.
• Value Line projects 9.4% annualized growth from ’22-’27.
• CFRA projects contraction of 18.8% YOY and 5.9% per year for ’23 and ’22-’24 along with a 3-year CAGR of 4.0%.
• M* projects long-term annualized contraction of 0.7%.

My 2.0% per year forecast is below the 5-long-term-estimate mean (3.4%) due to two negative projections. I will use ’22 EPS of $4.72/share as the initial value rather than 2023 Q2 $4.88 (annualized).

My Forecast High P/E is 18.0. Over the past decade, high P/E ranges from 14.2 in ’22 to 32.1 in ’17 with a last-5-year mean of 21.7. The last-5-year-mean average P/E is 18.6. I am forecasting below the latter and every year but ’22.

My Forecast Low P/E is 9.0. Over the past decade, low P/E ranges from 10.9 in ’22 to 27.1 in ’17 with a last-5-year mean of 15.5. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) of $42.50 is default based on ’22 EPS. This is 21.8% less than the previous closing price and 17.5% less than the 2021-22 low.

Over the past decade, Payout Ratio ranges from 40.7% in ’22 to 88.5% in ’17 with a last-5-year mean of 59.0%. I am forecasting conservatively below the range at 40.0%.

These inputs land SON in the BUY zone with a U/D ratio of 3.3. Total Annualized Return (TAR) is 13.8%.

PAR (using Forecast Average—not High—P/E) is 8.3%, which is less than I seek in a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR 13.8% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 8 studies (my study and one other outlier excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 4.7%, 8.1%, 18.9, 15.3, and 56.7%, respectively. I am lower across the board. Value Line’s projected average annual P/E of 16.0 is lower than MS (17.1) and higher than mine (13.5).

MS high / low EPS are $7.15 / $4.79 vs. my $5.21 / $4.72 (per share). My high EPS is lower due to a lower growth estimate. Value Line projects $7.40/share for high EPS, which is above the others.

MS LSPF of $48.90 implies a Forecast Low P/E of 10.2: less than the above-stated 15.3 and 33.3% less than the default $4.79/share * 15.3 = $73.29, which results in more conservative zoning. MS LSPF still remains 15.1% greater than mine.

My TAR (over 15.0% preferred) is less than MS 20.4%. While the MS sample size is too small for a valid comparison, I consider MOS to be at least moderate in this study because all inputs are conservative [i.e. at the bottom (or below) respective ranges, below the mean, etc.].

I track a few different valuation metrics. PEG is 2.1 and 5.5 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is cheap at 0.6. Kim Butcher’s “quick and dirty DCF” prices the stock at 10.0 * [$10.65 – ($2.24 + $3.15)] = $52.60, which suggests the stock to be 3.2% overvalued.

One thought worthy of further consideration is that longer-term averages will mean less if the ’22 acquisition of Ball Metalpack shocks parameters into completely new ranges.

SON is a BUY under $55/share. I would personally wait for price to drop a bit lower to meet my TAR criterion of 15.0%.