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Greif (GEF) Poised to Grow, Slowdown in China Remains a Drag


On Jun 16, we issued an updated research report on Greif, Inc. GEF.

The company is poised to benefit from sale of non-core assets and strong liquidity position. However, sluggish global industrial economy, slowdown in China, lower oil prices, a strong U.S. dollar and dismal seasonal agricultural sales will remain headwinds for Greif.

Notably, Greif has implemented a strategy to enhance its business portfolio, address under-performing assets and generate additional cash. This strategy includes selling, general and administrative reductions throughout the company, and rationalization of manufacturing facilities. These efforts will drive long-term performance. During fiscal 2016, the company completed four divestitures. These divestitures were of non-strategic businesses, three in the Rigid Industrial Packaging & Services segment, and one in the Flexible Products & Services segment.

Further, Greif expects capital expenditures, excluding purchases of and investments in timber properties, to be nearly $100–$115 million in fiscal 2017. The capital expenditures will involve replacing and improving existing equipment, as well as funding new facilities.

However, the company slashed its fiscal 2017 adjusted earnings per share guidance to the range of $2.84–$3.02. It also trimmed its fiscal 2017 free cash flow guidance range to $180–$200 million, due to the recently approved organic growth expansions in the Rigid Industrial Packaging & Services, and Paper Packaging & Services segments.

In addition, plunging oil prices have a direct impact on demand for industrial packaging in the energy sector. A number of energy producers had cut exploration and production activities in response to the sharply declining oil prices. Lower oil prices have also started to hamper the cost of Greif’s raw materials.

The company continues to see a very broad slowdown in China, which is particularly affected by the persistent pressure caused by supply and demand imbalance in a number of commodity material sectors. Moreover, Greif’s performance will be hit by sluggish global industrial economy, a strengthening U.S. dollar, poor containerboard prices and weaker-than-expected seasonal agricultural sales.

Greif currently carries a Zacks Rank #3 (Hold).

Share Price Performance

Greif outperformed the Zacks classified Containers-Metal/Glass sub-industry with respect to price performance over the past one year. The stock gained around 40.9%, while the industry recorded growth of 12.9% over the same time frame.

Stocks to Consider

Better-ranked stocks in the industrial products sector include AGCO Corp. AGCO, Altra Industrial Motion Corp. AIMC and Silgan Holdings Inc. SLGN. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO has a remarkable average positive earnings surprise of 40.39% for the last four quarters. Altra Industrial Motion generated an average positive earnings surprise of 15.93% over the trailing four quarters. Silgan has delivered an average positive earnings surprise of 6.20% in the past four quarters.

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