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Greif Bets on Caraustar Acquisition, High Debt a Concern

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On Mar 7, we issued an updated research report on Greif, Inc. (GEF - Free Report) . The company is poised to gain from the recently completed Caraustar acquisition, focus on operational execution and its strong and diverse product portfolio. However, lower volumes and unfavorable currency exchange rates in the Rigid Industrial Packaging & Services segment and higher debt levels remain near-term concerns.
 
Caraustar Buyout: A Strategic Fit
 
In February 2019, the company acquired Caraustar Industries, Inc. for $1.8 billion. The buyout will help strengthen Greif’s leadership in industrial packaging and significantly drive its margins, free cash flow and profitability. It is result in combined proforma revenues of $5.3 billion and EBITDA of more than $720 million.
 
Caraustar is vertically integrated in recycled paperboard manufacturing, which will also fortify and balance Greif's portfolio as well as expand its paper franchise. It will increase Greif's portion of sales from the United States from the current 50% to roughly 75% of total consolidated sales. Moreover, Greif's sales from paper packaging will expand to approximately 50% total consolidated revenues compared with 23% for fiscal 2018. Integration efforts are well underway and the company anticipates achieving at least $45 million of synergies over the next 36 months.
 
To include the impact of the acquired Caraustar business, Greif updated the adjusted earnings per share guidance for fiscal 2019 at $3.60-$4.00 from the previous $3.55-$3.95. The mid-point of the guidance reflects growth of 8% from $3.53 in 2018. The company will also benefit from its focus on operational execution, capital discipline, and a strong and diverse product portfolio.
 
On the flipside, at fiscal first quarter 2019-end, Greif’s leverage ratio stood at 3.6 due to the acquisition. The company will be prioritizing debt repayment till it achieves targeted leverage ratio of 2-2.5x net debt to EBITDA.
 
Few Hurdles to Cross in 2019
 
The company expects global macroeconomic conditions to remain choppy through 2019. The Paper Packaging & Services business segment will exhibit growth but at a lower trajectory on a year-over-year comparison.
 
In the Rigid Industrial Packaging & Services, volume weakness was mostly pronounced in Latin America in the first quarter fiscal 2019 owing to recessionary effect in Argentina and isolated operational challenges in the company’s Brazilian operations. In the Asia Pacific region, volumes were impacted by China’s slowing economy and mounting trade tensions. The volume environment in Western and Central Europe also remained muted on account of trade uncertainty and weak economic conditions. This is likely to continue in fiscal 2019 as well.
Currency exchange rates are anticipated to remain volatile and a concern for the Rigid Industrial Packaging & Services business segment. Price decline will also negatively impact the segment’s margins before improving in the back half of the year.
 
However during the year, Greif will focus on rationalizing operations and close underperforming assets in the Rigid Industrial Packaging & Services and Flexible Products & Services segments. This is likely to sustain margins
 
Share Price Performance
 
 
Over the past year, Greif has slumped 24% compared with the industry’s decline of 3%.
 
Zacks Rank & Stocks to Consider
 
Greif currently carries a Zacks Rank #3 (Hold).
 
A few better-ranked stocks in the Industrial Products sector are Mueller Industries, Inc. (MLI - Free Report) , Lawson Products, Inc. (LAWS - Free Report) and Albany International Corp. (AIN - Free Report) , each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Mueller Industries has expected earnings growth rate of 2.2% for 2019. The company’s shares have gained 20% over the past year.
 
Lawson Products has expected earnings growth rate of 102.5% for the current year. The stock has appreciated 23% in a year’s time.
 
Albany International has expected earnings growth rate of 35.6% for 2019. The company’s shares have rallied 17% in the past year.
 
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