Sonoco Earnings: Packaging Demand Remains Muted Amid Persistent Inventory Destocking

No-moat-rated Sonoco SON reported lackluster third-quarter results that were largely in line with our expectations. Net sales fell almost 10% year over year as both primary segments saw substantial declines. Lower volumes were met with unfavorable index pricing during the quarter as inventory destocking continues to weigh on demand for packaging in many of Sonoco’s end markets. Inflationary pressures and a shift in spending from goods to services adds to Sonoco’s amalgam of near-term headwinds. That said, the company has initiated additional cost-control measures that have buoyed margins, and we expect Sonoco will benefit from a subsequent rebound in demand when inventory destocking moderates. As such, we maintain our $55 fair value estimate.

The consumer packaging segment reported an underwhelming third quarter as inventory destocking and softening consumer demand continued to weigh on the business. Net sales fell 9% year over year, largely driven by an 8% decrease in volume. Many customers have remained cautious due to heightened economic uncertainty, which has led to destocking activity and stricter inventory management. That said, management noted that some end markets saw demand stabilize during the quarter, which could signal a much-needed slowdown in inventory destocking. We think destocking activities will likely play out through the end of the year, but inventory management initiatives could contain demand in the first half of next year.

Sonoco’s industrial packaging business fared worse in the quarter, with net sales tumbling almost 13% year over year as it continues to experience significant demand headwinds. Despite these challenges, the segment reported a 50-basis-point increase in operating margins to almost 13% as Sonoco works to manage costs given the current environment. Looking ahead, we expect global paper demand to remain soft through the end of the year, but Sonoco should benefit from improving industrial demand in North America.