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Greif Rides on Caraustar Buyout & Restructuring, Debt High


On Sept 11, we issued an updated research report on Greif, Inc. GEF. The company is poised to gain from focus on operational execution and cost reduction activities. Its strong and diverse product portfolio and the Caraustar acquisition will also drive growth.

Q3 Earnings Beat Estimates

Greif had reported adjusted earnings per share of $1.26 for third-quarter fiscal 2019 (ended July 31, 2019), beating the Zacks Consensus Estimate of $1.18. The figure also improved 5% year over year despite market softness and weakening industrial economy. Dismal market demand in containerboard operations and in certain segments of Rigid Industrial Packaging business affected results in the quarter.

Upbeat Outlook For 2019 Despite Headwinds

Greif’s adjusted earnings per share guidance for fiscal 2019 is pegged between $3.70 and $4.00. The mid-point of the guidance reflects year-over-year growth of 6.6%. Demand for containerboard is expected to improve during the current year. The outlook also reflects impact of the acquired Caraustar business. Greif will also benefit from focus on operational execution, capital discipline, and a strong and diverse product portfolio. The company continues to execute cost-reduction activities across portfolio to counter softer market demand.

As mentioned earlier, the Rigid Industrial Packaging & Services segment’s performance was impacted in the fiscal third quarter owing to the prevailing soft demand in global markets. Volume weakness was pronounced in West and Central Europe, Asia Pacific region and the U.S. Gulf Coast on account of trade uncertainty and reduced chemical import demand from China. This is likely to continue in the balance of fiscal 2019 as well. Currency exchange rates are anticipated to remain volatile. This will weigh on Greif’s results in fiscal 2019.

The Zacks Consensus Estimate for earnings for Greif for fiscal 2019 is currently pegged at $3.81, indicating an improvement of 7.93% from the year-ago quarter.

Restructuring Activities to Bear Fruit

Greif’s restructuring activities will focus on rationalizing operations and closing underperforming assets in the Rigid Industrial Packaging & Services and Flexible Products & Services segments. Moreover, investing in existing businesses through maintenance projects and organic growth opportunities remain Greif’s priority in order to support deleveraging plan.

Caraustar Acquisition: A Key Catalyst

In February 2019, the company completed the acquisition of Caraustar Industries, Inc. and is currently integrating operations. The buyout strengthened Greif’s leadership in industrial packaging and significantly bolstered margins, free cash flow and profitability. The company has identified $15 million of new estimated run-rate synergies related to this acquisition and estimates that it will be able to achieve at least $65 million of run-rate synergies by the end of fiscal 2022. Notably, Greif generates approximately half of revenues from the United States. Furthermore, the percentage of Greif's sales from paper packaging will expand to approximately half of total consolidated revenues.

However, high debt following the Caraustar acquisition remains a concern. Consequently, the company will be prioritizing debt repayment till it achieves targeted leverage ratio of 2-2.5x net debt to EBITDA.

Price Performance

Year to date, Greif’s shares have gained 5.3%, against the industry’s decline of 21.9%.

Zacks Rank and Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are AGCO Corporation AGCO, Albany International Corporation AIN and UFP Technologies, Inc. UFPT. All of these stocks carry a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AGCO Corp has a projected earnings growth rate of 31.11% for the current year. The stock has gained 39% so far this year.

Albany International has an estimated earnings growth rate of 33.85% for 2019. The company’s shares have gained 40% year to date.

UFP Technologies has an expected earnings growth rate of 8.10% for the ongoing year. The stock has appreciated 35% over the past year.

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