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Greif (GEF) Rides on Capital-Expansion Moves Amid Inflation

Zacks

On Jun 13, we issued an updated research report on Greif, Inc. GEF. The company is poised to gain from its focus on capital-expansion projects, favorable price-cost relationship and the U.S. tax reform. However, persistent raw material cost inflation, concerns in the China business and elevated expenses might mar the company’s growth in the near future.

Let’s illustrate the factors in detail.

Greif to Gain From Capital-Expansion Projects

Greif’s performance will be supported by capital-expansion projects and acquisitions. The company recently commissioned the Kaluga steel drum plant in Russia, which further fortifies its presence in the country, as well as strengthens its partnerships with strategic customers. It continues to expand its global IBC footprint, with the recently-commissioned new lines in Spain, Houston, and new lines being added in Chicago, Russia and the Netherlands.

Greif will also benefit from the expansion of the company’s plastic offerings by adding several new blow mowers in the United States and small plastic lines in Israel. In Paper Packaging, its expansion in MultiCorr is complete and operational in time for the agricultural season. It is also expanding the CorrChoice sheet feeder network with a new facility in the mid-Atlantic region. This project is expected to be operational in Q4 of fiscal 2019. These capital projects and expansions will drive the company’s performance.

Tax Reform to Drive Earnings

Greif currently anticipates additional financial flexibility as a result of the tax-reform changes regarding cash repatriation. The company expects the tax rate to be between 28% and 32% for fiscal 2018, lower than 33.5% recorded in fiscal 2017.

Favorable Price-Cost Relationship to Boost Results

Greif raised its adjusted earnings per share guidance for fiscal 2018 to $3.45-$3.70, on the back of improved price-cost balance in containerboard. Its RIPS segment is expected to report the strongest adjusted operating profit in fourth-quarter fiscal 2018 due to the timing of raw material pricing adjustments.

Further, the company’s Paper Packaging segment will deliver the strongest operating profit performance in the fiscal fourth quarter, benefiting from containerboard price increases. Old corrugated container (OCC) costs are currently favorable when compared with the fiscal 2017 levels. Greif assumes that the blended OCC cost for the entire fiscal will be $93 a ton compared to the prior projection of $137 a ton.

Inflation Remains a Woe

Greif’s performance will be impacted by the prevalent raw material cost inflation through the rest of fiscal 2018. Its Rigid Industrial Packaging segment continues to experience significant steel price increase due to the Section 232 tariffs.

Concerns in China business

Greif expects its China business to continue experiencing lower volumes as a result of the ongoing competitive market conditions, strategic pricing decisions, and a plant closure of a significant customer.

Escalating Expenses to Impede Greif’s Profit

Greif raised its other expense outlook for fiscal 2018 to $15-$20 million, due to elevated pension costs related to a change in investment return assumptions. This will impact earnings by 8 cents per share in the fiscal.

Share Price Performance

Greif has outperformed its industry with respect to price performance over the past three months. The stock has gained 5.2%, while the industry has recorded growth of 0.5%.



Zacks Rank & Stocks to Consider

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

Better-ranked stocks in the same sector include Axon Enterprise, Inc AAXN, DMC Global Inc. BOOM and W.W. Grainger, Inc. GWW. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Axon Enterprise has a long-term earnings growth rate of 25%. Its shares have appreciated 68%, over the past three months.

DMC Global has a long-term earnings growth rate of 20%. The company’s shares have been up 61% in the past three months.

Grainger has a long-term earnings growth rate of 12.1%. The stock has gained 12% in the past three months.

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