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Sonoco Hurt By Weak Demand And High Pension Costs
The slowing global economy continues to create havoc in the industrial economy, as Sonoco Products Company (NYSE:SON) lowered earnings guidance for the fourth quarter and 2008 due to "significantly slowing global economic conditions" and higher pension expenses.
The company cut fourth-quarter diluted earnings per share to a range of 48-52 cents, from the previous 60-64 cents. Full year 2008 went to a range of $2.23-2.27 per share from the previous $2.36-2.40. Sonoco set 2009 earnings at $1.95-2.05 per share.
Sonoco said that its Consumer Packaging segment has held up well during the recession, but the businesses that serve "industrial markets" were seeing unexpected volume declines.
Pension Nightmares
The second reason cited by Sonoco was a higher pension expense, as Sonoco's pension plan went from being overfunded by $40 million by the end of 2007, to being underfunded by $138 million in November 2008. The company said its pension expense would increase by $48 million or 30 cents a share in 2009, although this would be a non-cash item. (For an in depth analysis of this long term liability, check out Financial Statements: Pension Plans.)
Higher pension expenses are something that investors may be hearing more about in 2009, as companies adjust its assumptions regarding long-term rates of return and interest rates.
Credit Suisse estimates that companies in the S&P 500 are looking at a pension underfunding of almost $200 billion in 2009 as the bear market in equities has reduced the value of assets in company plans. In 2006 a new law was passed that required pension assets to equal at least 94% of projected liabilities by January 1, 2009. The combination of these two issues will cause more companies to contribute to their plans. The Credit Suisse analysis said that at least 128 of the 500 companies in the index would see a reduction in earnings in 2009. (Find out why the 2006 act may not be all it's cracked up to be in The Pension Bill: A Wolf In Sheep's Clothing.)
Other Pension Liabilities
General Motors (NYSE:GM) which has the largest pension fund among the S&P 500 companies is currently over funded with assets covering 108% of liabilities at the end of 2007. This will shrink to 96% by the end of 2008.
Even companies that have been making huge profits are behind in covering pension liabilities. Exxon Mobil's (NYSE:XOM) pension plan was only 81% funded at the end of 2007, and it is projected at the end of 2008, the funding will be only 63%. One of the biggest earnings impact will be to Northrop Grumman (NYSE:NOC), which will see earnings reduced by $1.74 per share in 2009.
Bottom Line
The decline in commodity costs will help these companies in 2009, as raw material costs fall, but it won't be enough to offset weaker demand. Although Sonoco's stock price seems to have found support in the low $20s, the depth and duration of the recession is unknown, and the next level of support in the stock is not until the mid-teens.
The company cut fourth-quarter diluted earnings per share to a range of 48-52 cents, from the previous 60-64 cents. Full year 2008 went to a range of $2.23-2.27 per share from the previous $2.36-2.40. Sonoco set 2009 earnings at $1.95-2.05 per share.
Sonoco said that its Consumer Packaging segment has held up well during the recession, but the businesses that serve "industrial markets" were seeing unexpected volume declines.
Pension Nightmares
The second reason cited by Sonoco was a higher pension expense, as Sonoco's pension plan went from being overfunded by $40 million by the end of 2007, to being underfunded by $138 million in November 2008. The company said its pension expense would increase by $48 million or 30 cents a share in 2009, although this would be a non-cash item. (For an in depth analysis of this long term liability, check out Financial Statements: Pension Plans.)
Credit Suisse estimates that companies in the S&P 500 are looking at a pension underfunding of almost $200 billion in 2009 as the bear market in equities has reduced the value of assets in company plans. In 2006 a new law was passed that required pension assets to equal at least 94% of projected liabilities by January 1, 2009. The combination of these two issues will cause more companies to contribute to their plans. The Credit Suisse analysis said that at least 128 of the 500 companies in the index would see a reduction in earnings in 2009. (Find out why the 2006 act may not be all it's cracked up to be in The Pension Bill: A Wolf In Sheep's Clothing.)
Other Pension Liabilities
General Motors (NYSE:GM) which has the largest pension fund among the S&P 500 companies is currently over funded with assets covering 108% of liabilities at the end of 2007. This will shrink to 96% by the end of 2008.
Even companies that have been making huge profits are behind in covering pension liabilities. Exxon Mobil's (NYSE:XOM) pension plan was only 81% funded at the end of 2007, and it is projected at the end of 2008, the funding will be only 63%. One of the biggest earnings impact will be to Northrop Grumman (NYSE:NOC), which will see earnings reduced by $1.74 per share in 2009.
Bottom Line
The decline in commodity costs will help these companies in 2009, as raw material costs fall, but it won't be enough to offset weaker demand. Although Sonoco's stock price seems to have found support in the low $20s, the depth and duration of the recession is unknown, and the next level of support in the stock is not until the mid-teens.
by
Eric Fox
Eric J. Fox, CFA, is a freelance financial writer and has previous experience working in the asset management industry as an equity analyst and portfolio manager on the buy side. His favorite area to write on is the energy sector and he keeps current on the industry by reading Haynesville Shale, Permian Oil and Gas and various other blogs.
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