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Greif (GEF) Rides on Solid End-Market Demand Amid Cost Woes

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Greif, Inc. (GEF - Free Report) is well-poised to benefit from solid demand in its key end markets and expected synergies from the Caraustar acquisition. Focus on operational execution and capital discipline will drive growth. Despite inflated costs, labor shortage and supply chain issues plaguing the company in the near term, its price increase actions and savings from restructuring actions are likely to negate some of the impacts.

Strong Demand & Price Actions to Offset Cost Woes in 2022

Greif recently reported fiscal 2021 results. Adjusted earnings per share surged 74% year on year to $5.60, while sales increased 23% year over year to $5.56 billion. The company beat the Zacks Consensus Estimate on both counts.

The Global Industrial Packaging segment, which contributed around 60% to the company’s revenues, has been gaining from strong key end markets. Volume growth has been particularly robust in global rigid Intermediate Bulk Container (IBC) and large plastic drum in the last few quarters, courtesy of the strategic growth investments in the United States and EMEA, and ongoing recovery in the industrial end markets.

The Paper Packaging segment that accounted for around 40% of Greif’s fiscal 2021 revenues has been benefiting from strong volumes in converting operations and higher selling prices due to increases in published containerboard and boxboard prices. Backed by these trends, Greif anticipates adjusted EPS between $5.85 and $6.45 in fiscal 2022. The mid-point of the guidance indicates a year-over-year improvement of 10%.

Increasing raw material, energy, chemical costs and transportation costs are anticipated to weigh on the company’s margins in the near term. Labor shortages and supply chain issues remain headwinds. Greif has been implementing price increases, which are likely to aid earnings. It has reached a lower interest rate tier in its credit facility as a result of substantial debt repayments, which in turn will bolster its earnings in the forthcoming quarters.

Caraustar Acquisition to Aid Growth

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

Restructuring Activities, Solid Balance Sheet Bode Well

Greif will continue to benefit from the focus on operational execution, capital discipline, and a strong and diverse product portfolio. The company continues to focus on its restructuring activities, which include optimizing and integrating operations and closing underperforming assets.

In April 2020, Greif divested its consumer packaging group business that enabled it to focus on core industrial franchise and strategic growth priorities in IBC production and containerboard integration. The company has recently signed an agreement to sell its 50% ownership in the Flexible Products & Services joint venture for cash proceeds of $123 million, which will be utilized to lower debt.

Greif continues to invest in the business, return excess cash to shareholders through an attractive and growing dividend policy, lower its debt levels. GEF’s total debt to total capital ratio was at 0.58 as of the end of fiscal 2021, compared with the industry’s 0.60. Its times interest earned ratio is at 6.2. Greif paid $105.8 million in cash dividends to stockholders in fiscal 2021. Its dividend yield is higher than its peers and plans to increase its dividend in fiscal 2022.

Price Performance

Zacks Investment ResearchImage Source: Zacks Investment Research

The stock has gained 22.7% in a year’s time, outperforming the industry’s growth of 11.7%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Berry Global Group, Inc. (BERY - Free Report) , AGCO Corporation (AGCO - Free Report) and Sealed Air Corporation (SEE - Free Report) . While BERY flaunts a Zacks Rank #1 (Strong Buy), AGCO and SEE carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Berry Global Group has an estimated earnings growth rate of around 2.8% for fiscal 2022. In the past 60 days, the Zacks Consensus Estimate for fiscal 2022 earnings has been revised upward by 18%.

In a year, the stock has increased 37%. Berry Global Group has a trailing four-quarter earnings surprise of 16.5%, on average.

AGCO Corporation has an expected earnings growth rate of 16.3% for 2022. The Zacks Consensus Estimate for current-year earnings has moved 1% north in the past 60 days.

AGCO Corporation’s shares have gained 10.5% in the past year. AGCO has a trailing four-quarter earnings surprise of 47.5%, on average.

Sealed Air has a projected earnings growth rate of 16.2% for the current year. The Zacks Consensus Estimate for 2022 earnings has moved north by 0.7% over the past 60 days.

SEE’s shares have appreciated 52.5% in a year. Sealed Air has a trailing four-quarter earnings surprise of 6.5%, on average.