Global manufacturer of consumer and industrial packaging products Sonoco Products Company (SON) reported first quarter EPS of $0.54, down 5.3% y-o-y, primarily due to lower volume and higher labor, raw material, energy and freight costs.

However, first quarter EPS exceeded our estimate of $0.50 due to productivity gains and the impact of acquisitions. While top-line growth is benefiting from acquisitions, higher selling prices and favorable currency impact, we expect restructuring initiatives and productivity gains to add to profitability.

Moreover, healthy cash generation paves the way for acquisitions and share buyback. However, the company's profitability faces challenge from continued volume declines in the tube and cores and the consumer packaging segments, unfavorable mix of business and higher raw material, energy, freight, and labor costs. We retain our Hold rating on shares of SON.

The main driver behind Sonoco's sales to retail markets is new product introduction. In the first quarter, new product sales were $27.9 million. Over the next five years, revenue growth is expected to come equally from organic growth and acquisitions.

SON plans to cut about 520 jobs globally. The company's bottom line is benefiting from productivity gains, which was a positive $8.7 million in Q108. For 2008, management expects $100 million in productivity gains.

We estimate Sonoco's 2008 EBITDA (excluding restructuring charges) to increase to $354 million. At its current valuation, Sonoco is trading at an EV/EBITDA multiple of 11.5x 2008 EBITDA, which is above the higher end of the industry multiple of between 7.4x and 9.4x. Sonoco's current valuation adequately reflects its near-to-medium-term growth prospects. Our target price of $34.50 is based on an EV/EBITDA multiple of approximately 11.7x our 2008 estimated EBITDA of $354 million.