For the past eight quarters, packaging specialist Sonoco Products (NYSE:SON) has delivered estimate-beating results to Motley Fool Income Investor subscribers who heeded Mathew Emmert's advice to buy the stock. Tomorrow, investors get to open up yet another package of quarterly earnings delivery from Sonoco, for Q2 2006. What will they find inside?

What analysts say:

  • Buy, sell, or waffle? Eight analysts follow Sonoco, but with little enthusiasm. Only one rates it a buy, and all the rest say hold.
  • Revenues. They expect sales to increase a mere 5% in comparison with last year, to $920.2 million.
  • Earnings. And they predict just a 4% rise in earnings to $0.47 per share.

What management says:
Wall Street analysts love to opine on earnings and sales under generally accepted accounting principles. But here at the Fool, we prefer to focus on a company's cash profits. In that, we're on the same page with Sonoco CEO Harris DeLoach, who doesn't just run down the GAAP numbers in his firm's earnings reports, but also lays out the cash flow situation.

Last quarter, for example, DeLoach didn't stop at citing Sonoco's impressive 22% rise in first-quarter income. He went on to describe how Sonoco tripled the operating cash flow generated in Q1 2005 through improved margins and better management of working capital. Out of $69 million in pre-tax cash profits, Sonoco spent $28 million on capital expenditures and returned $23 million to shareholders in the form of dividends. Moreover, the company added to its debt in buying back $70 million worth of its own shares, a move suggesting that Sonoco management believes its stock is deeply undervalued.

What management does:
So here we have two clearly contrasting views of Sonoco's stock. Wall Street thinks the shares should, at best, be held. Management is buying those same shares hand over fist. So who's right? My vote goes to management.

On the surface, Sonoco's margin trends may not look impressive. From a rolling perspective, gross, operating, and net margins haven't improved much over the past 18 months. However, a theme consistently discussed in Sonoco's earnings reports is the high price of raw materials, which have contracted the company's margins. I suspect that Sonoco sees these high prices as cyclical, and toward the top end of a cycle. It's buying back shares today, in anticipation that its operational improvements will yield rapidly expanding margins once raw-material costs start to fall.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

18.2

18.4

18.3

18.2

18.7

18.9

Op.

8.7

9.0

8.8

8.9

8.8

8.9

Net

4.8

4.6

4.5

4.6

4.6

4.8

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

The Fool says:
In this, I'm in disagreement with the Fool analyst who first picked Sonoco out of the hat. Mathew Emmert, who follows the stock as closely as any in his Motley Fool Income Investor portfolio, recently updated his opinion of the company, calling it "fully valued." To get the Fool scoop on why Mathew's less enamored of Sonoco today, claim a free 30-day trial on the newsletter. In it, you'll have access not just to Mathew's original investment thesis, but also to the reasons he thinks Sonoco investors should hold on to their wallets and wait for better prices.

Competitors:

  • Bemis (NYSE:BMS)
  • Caraustar Industries (NASDAQ:CSAR)
  • Potlatch (NYSE:PCH)
  • Smurfit-Stone (NASDAQ:SSCC)
  • Stora Enso (NYSE:SEO)

Fool contributorRich Smithdoes not own shares of any company named above.