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Greif (GEF) Stock Plunges 13% YTD: What's Hurting the Stock?

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Greif Inc.’s (GEF - Free Report) performance continues to bear the brunt of weak demand owing to the coronavirus crisis and a lackluster industrial manufacturing environment. Shares of the company have lost 13.4% year to date compared with the industry’s decline of 1.5%.

Notably, the Zacks Consensus Estimate for fiscal 2020 earnings per share is pegged at $3.22, indicating a decline of 18.7% from the prior year. The estimate has gone down 7% over the past 30 days.

What’s Affecting the Stock?

On Aug 26, 2020, the company reported third-quarter fiscal 2020 (ended Jul 31, 2020) results. Greif reported adjusted earnings per share of 85 cents, missing the Zacks Consensus Estimate of 86 cents. The bottom line also plunged 32.5% year on year. The results were impacted by soft industrial conditions across its global portfolio, and the pressure of price and cost on the paper business.

Greif expects adjusted earnings per share in fiscal 2020 between $3.00 and $3.20. The mid-point of the guidance indicates a slump of 22% from the prior year. The company anticipates global macroeconomic conditions to remain volatile throughout the remainder of the fiscal year owing to the ongoing pandemic.

The company is witnessing sluggish demand within the textile, industrial paints, coatings and lubricant industries owing to the coronavirus crisis. Around 60% of the Rigid Industrial Packaging & Services segment’s revenues are generated from steel drums. The ongoing volume declines in steel drums will continue to hinder the segment’s results.

Is a Rebound Likely?

Greif continues to witness increase in demand in food, pharmaceutical and household goods industries owing to the COVID-19 pandemic. This is likely to persist until the situation stabilizes. The company will also continue to benefit from focus on operational execution, capital discipline, and a strong and diverse product portfolio. Moreover, it continues to execute pricing actions. In fact, in the wake of the coronavirus-induced crisis, Greif has initiated variable cost reduction plans, which include plant rationalization, furloughs and shift reductions.

The company has already undertaken actions, which are likely to lead to roughly $40 million of EBITDA benefits over the remainder of fiscal 2020. The company is also postponing non-critical expenses, including capital investments. It now plans to spend between $120 million and $140 million on capital expenditures in fiscal 2020.

In February 2019, the company completed the acquisition of Caraustar Industries, Inc. and is currently integrating its operations. The buyout strengthened Greif’s leadership in industrial packaging and significantly bolstered margins, free cash flow and profitability. It continues to anticipate run rate synergies to at least $70 million by 2022. In fiscal 2020, the Paper Packaging segment is likely to benefit from the Caraustar acquisition and from various new capital growth projects coming online, which includes a new corrugated sheet feeder in Palmyra, PA.

Per the Institute for Supply Management’s latest report, the U.S Purchasing Managers’ Index (PMI) came in at 56% for August, following a reading of 54.2 in July and 52.6 in June.  This was the biggest expansion in the manufacturing sector since November of 2018 as August marked the first full month of operations. Considering that the PMI was consistently below 50 (which denotes contraction) during March to May, the recovery over the past three months instills optimism. A pick up in the industrial sector will be beneficial for Greif.

We believe that these factors will eventually benefit Greif’s results and aid its share price post a turnaround.

Zacks Rank & Key Picks

Greif currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Industrial Products sector include IIVI Incorporated (IIVI - Free Report) , Silgan Holdings, Inc. (SLGN - Free Report) and SiteOne Landscape Supply, Inc. (SITE - Free Report) . While IIVI sports a Zacks Rank #1 (Strong Buy), Silgan and SiteOne carry a Zacks Rank of 2 (Buy), currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

IIVI has an estimated earnings growth rate of 29% for the ongoing year. The company’s shares have gained 16% so far this year.

Silgan has a projected earnings growth rate of 28.7% for 2020. The company’s shares have appreciated 24% year to date.

SiteOne Landscape has an expected earnings growth rate of 15.4% for the current year. Year to date, the stock has surged 31%.

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