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Greif (GEF) Rides on Strong End-Market Demand & Cost Cuts

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On Sep 7, we issued an updated research report on Greif, Inc. (GEF - Free Report) . The company is benefiting from the forecast-topping third-quarter fiscal 2021 results and an upbeat outlook. It is poised well to gain from solid demand in the key end markets and pricing actions. Focus on operational execution, restructuring actions and capital discipline will also drive growth.

The company recently reported adjusted earnings of $1.93 per share for third-quarter fiscal 2021, up 127% from the prior-year period. Additionally, the bottom line surpassed the Zacks Consensus Estimate of $1.60. The company generated revenues of $1,491 million in the reported quarter, reflecting year-over-year growth of 38%. The top-line figure also beat the Zacks Consensus Estimate of $1,432 million.

Segments Poised to Grow on Solid End Markets

Greif is witnessing broad-based improvement in several of its key end markets. The company’s Global Industrial Packaging segment has been witnessing strong volume growth for chemicals, specialty chemicals and lubricants. It witnessed solid volume performance across all key substrates with impressive growth in the global rigid Intermediate Bulk Container (IBC) and large plastic drum during the fiscal third quarter. The segment will continue to benefit from these factors in the fiscal fourth quarter as well.

The Paper Packaging & Services segment has been benefiting from strong volumes in converting operations and higher selling prices owing to increases in the published containerboard and boxboard prices. The improved demand for textiles and protective packaging has been driving tube and core volumes. This momentum is likely to continue in the fiscal fourth quarter.

Greif has raised the current-year adjusted earnings per share guidance on the back of its strong performance so far this fiscal year, and positive outlook for the remainder of fiscal 2021. It now expects fiscal 2021 adjusted earnings per share between $5.10 and $5.30, up from the prior guidance of $4.55 and $4.85. The mid-point of the new guidance indicates a year-over-year improvement of 68%.

Caraustar Buyout Acting as a Catalyst

In February 2019, the company completed the acquisition of Caraustar Industries, Inc. and is currently integrating its operations. The buyout has strengthened Greif’s leadership in industrial packaging, and significantly bolstered its margins, free cash flow and profitability. It continues to anticipate run rate synergies to at least $70 million by 2022. This will be backed by footprint optimization, unlocking incremental sourcing/commercial opportunities and savings related to system implementations.

Restructuring, Cost Reductions to Drive Margins

Greif will benefit from its focus on operational execution, capital discipline, and a strong and diverse product portfolio. The company will continue to focus on its restructuring activities, which include optimizing and integrating operations in the Paper Packaging & Services segment, rationalizing operations, and closing underperforming assets in the Global Industrial Packaging segment. Moreover, it has been implementing price increases in response to the robust demand, and combat cost inflation, which is likely to aid earnings.

Efforts to Reduce Debt Bode Well

The company is taking steps to improve its liquidity following the high debt related to the Caraustar acquisition. It reduced the net debt by $371 million in a year’s time and ended the third-quarter fiscal 2021 with a net debt of $2,168 million. The company’s compliance leverage ratio fell to 2.8x. Given the improving leverage profile and strong prospects for future cash generation, the company’s board hiked the quarterly dividend by 4.5%. For fiscal 2021, the adjusted free cash flow is anticipated between $335 million and $365 million, up from the previous guidance of $285-$325 million.

Price Performance

So far this year, Greif’s shares have appreciated 42.8%, outperforming the industry’s growth of 15.9%.

Zacks Investment Research
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Zacks Rank & Key Picks

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

Better-ranked stocks in the Industrial Products sector include Encore Wire Corporation (WIRE - Free Report) , Terex Corporation (TEX - Free Report) and Lincoln Electric Holdings, Inc. (LECO - Free Report) . While Encore Wire and Terex sport a Zacks Rank #1 (Strong Buy), Lincoln Electric carries a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Encore Wire has a projected earnings growth rate of 332.6% for fiscal 2021. So far this year, the company’s shares have gained 45%.

Terex has an estimated earnings growth rate of 2,207.6% for 2021. The company’s shares have gained 47.4% so far this year.

Lincoln Electric has an expected earnings growth rate of 45.1% for 2021. The stock has appreciated 22%, year to date.