Sonoco Navigates Challenging Operating Environment Amid Softening Demand

We are initiating coverage of Sonoco Products SON with a $55 fair value estimate and a no-moat rating. Sonoco produces a wide range of consumer and industrial packaging, from Pringles cans to foam automotive bumpers to toilet paper cores. Sonoco’s two primary segments, consumer packaging and industrial paper packaging, supply customers with both flexible and rigid packaging products that serve nearly any packaging need. In recent years, Sonoco has undergone a portfolio transformation, now focusing on a few core businesses and divesting from nonprioritized products and markets like high-density film, European contract packaging, and more.

We assign Sonoco a stable moat trend rating because we don’t expect its competitive advantages to materially strengthen or weaken over the next five years. Sonoco largely makes commoditized packaging products with undifferentiated production processes. Durable competitive advantages are uncommon in the packaging industry and are usually generated through an efficient scale moat source or transportation cost advantage. We think the threat of new entrants is minimal as new entrants would likely be small producers that specialize in a specific substrate or end market. It would be difficult for a new entrant to win business from large packaged goods companies because it would need to match Sonoco’s vast product offering.

Sonoco reported strong 2022 results as steady demand for its packaging products was met with robust pricing gains during the year. The consumer segment saw strength in its rigid paper containers business while the industrial segment benefited from historically low old corrugated container costs. That said, much of the pricing gains Sonoco made during the year was to recover higher input and operating costs from 2021. We expect Sonoco’s pricing gains to slow and return to more normalized rates as inflationary pressures soften through the year.