Sonoco Earnings: Volumes Remain Pressured Amid Tepid Global Packaging Demand

No-moat-rated Sonoco SON reported underwhelming second-quarter results, largely due to higher-than-expected inventory destocking and softening end market demand. Net sales fell almost 11% year over year as all three segments saw declines in volumes. Despite strong demand for some of its consumer packaging, Sonoco continues to navigate a challenging operating environment as inventory management and inflationary pressures weigh on demand for its products. As such, we maintain our $55 fair value estimate.

Sonoco’s consumer packaging segment struggled during the quarter amid continued retail destocking and inventory management from its customers. Revenue decreased roughly 7% but the segment’s operating margin fell almost 400 basis points from a year ago to 10.3%, largely due to a decline in volume. Customers continued to work through built up inventory, but management noted that its flexible packaging and paper-based containers both experienced ample demand in the quarter. While we expect the segment’s margins will somewhat recover as Sonoco works through its metal price overlap, volumes will likely remain pressured through the end of the year.

The industrial paper packaging segment was hit hardest in the quarter, as inventory destocking trends and weak global demand for paper products led to an almost 20% decline in revenue year over year. That said, the segment reported a 15% operating margin, which was up almost 200 basis points from a year ago due to cost management initiatives. We expect muted near-term global paper demand but improving costs should provide margin relief. Sonoco lowered its full year guidance due to the challenging operating environment that has pressured volumes. Management now expects full-year adjusted EPS of $5.25 (midpoint) from $5.85 (midpoint) previously. We think management’s new guidance is achievable given the resiliency of its margins, but near-term demand headwinds will likely weigh on volume growth through the end of the year.