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Here's Why You Should Hold On to Greif (GEF) Stock for Now

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Greif, Inc. (GEF - Free Report) is poised to gain from focus on operational execution, cost-reduction activities, and its solid and diverse product portfolio. The Caraustar acquisition will also drive growth.

The company has a market capitalization of $1.9 billion. Moreover, Greif outpaced the Zacks Consensus Estimate in each of the trailing four quarters, the average positive surprise being 14.7%.

Factors Favoring Greif

Favorable Zacks Rank & VGM Score: At present, Greif carries a Zacks Rank #3 (Hold). It has a VGM Score of A. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, offer the best investment opportunities for investors.

Cheap Valuation: Greif’s trailing 12-month EV/EBITDA ratio is 6.99, while the industry's average trailing 12-month EV/EBITDA is 17.49. Consequently, the stock is cheaper at this point based on the ratio.

Earnings Growth: The company has delivered an earnings growth rate of 15.7% over the past five years, ahead of the industry’s 9.2%. The momentum is likely to continue as evident from the company’s estimated long-term earnings growth rate of 10%.

Growth Drivers in Place

Last February, Greif completed the acquisition of Caraustar Industries, Inc. for $1.8 billion, and is currently integrating its operations. The buyout has reinforced the company’s dominant position 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.

The Paper Packaging segment is likely to benefit from the Caraustar acquisition and various new capital growth projects coming online, including a new corrugated sheet feeder in Palmyra, PA.

Moreover, the company’s recent divestiture of the consumer packaging group business to Graphic Packaging Holding Company (GPK - Free Report) will enable Greif to deleverage balance sheet and optimize capital allocation priorities, while focusing on core industrial franchise and strategic growth priorities in Intermediate Bulk Container production and containerboard integration.

During first-quarter 2020, the company witnessed 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. Greif will also continue to benefit from focus on operational execution, capital discipline, and a strong and diverse product portfolio. Moreover, the company 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, shift reductions. The company anticipates to lower SG&A costs through targeted reductions or hiring delays across back office functions. It has already implemented actions that will lead to roughly $40 million of EBITDA benefits over the remainder of fiscal 2020.

Few Headwinds to Negate

Greif has withdrawn adjusted earnings and free cash flow guidance for fiscal 2020 due to end-market uncertainty on account of concerns over the duration and impact of the coronavirus pandemic on its business for the remainder of the fiscal year. The company witnessed softening demand within the textile, automotive, durable goods and lubricant industries on account of the pandemic. Further, the Rigid Industrial Packaging & Services segment has been grappling with weak demand due to the declining industrial manufacturing environment.

High debt, following the Caraustar acquisition, remains a concern. The company's total debt to total capital ratio is at 0.73 much higher than the industry's 0.61.

Bottom Line

Investors might want to hold on to the stock, at present, as it has ample prospects for outperforming peers in the near future.

Price Performance

Greif’s shares have gained 13.5% in the past year against the industry’s decline of 34.2%.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Silgan Holdings Inc. (SLGN - Free Report) and Broadwind Energy, Inc. (BWEN - Free Report) . While Silgan sports a Zacks Rank #1, Broadwind Energy carries a Zacks Rank of 2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Silgan has a projected earnings growth rate of 11.3% for 2020. The company’s shares have gained 15% in the past three months.

Broadwind Energy has an expected earnings growth rate of 174% for the current year. The stock has appreciated 6% over the past three months.

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