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Greif to Gain From Caraustar Acquisition Amid Weak Demand

Zacks Equity Research

On Dec 9, we issued an updated research report on Greif, Inc. GEF. The company is poised to gain from Caraustar acquisition, focus on operational execution and cost-reduction activities. However, weak demand owing to the declining industrial manufacturing environment remains a headwind.

Weak Volumes to Impact Fiscal 2020 Results

Greif’s adjusted earnings per share guidance for fiscal 2020 lies in the range of $3.63 to $4.13. The mid-point of the range depicts a decline of 2% thanks to the macroeconomic uncertainty.

The U.S manufacturing sector has been contracting for four consecutive months amid the U.S.-China trade war and weakening business conditions. This remains a concern for the Rigid Industrial Packaging & Services segment. For the segment, volume weakness is pronounced in West and Central Europe, Asia Pacific region and the United States on account of trade uncertainty. Currency exchange rates are anticipated to remain volatile. In the Flexible Products & Services segment, continued weak demand in Western Europe remains a concern.

On a positive note, the Paper Packaging segment is likely to fare better, benefiting from the Caraustar acquisition and various new capital growth projects coming online, which include a new corrugated sheet feeder in Palmyra, PA. Lower input cost will also contribute to margins.

The Zacks Consensus Estimate for Greif’s fiscal 2020 earnings is currently pegged at $3.97, indicating an improvement of 0.25% from the year-ago quarter.
 
Caraustar Acquisition: A Key Catalyst

In February 2019, the company completed the acquisition of Caraustar Industries, Inc. and is currently integrating the operations. The buyout strengthened Greif’s leadership in industrial packaging, and significantly bolstered margins, free cash flow and profitability.
 
Greif has raised anticipated run rate synergies to at least $70 million by 2022 from the prior estimate of $45 million. This will be backed by realized synergies of $24 million in fiscal 2019, footprint optimization, unlocking incremental sourcing/commercial opportunities and savings related to system implementations.

However, high debt following the Caraustar acquisition remains a concern. Currently, the company’s leverage ratio is at around 3.5x. Consequently, the company will be prioritizing debt repayment till it achieves targeted leverage ratio of 2-2.5x net debt to EBITDA.

Growth Drivers in Place

Greif will continue to benefit from focus on operational execution, capital discipline, and a strong and diverse product portfolio. The company continues to execute cost-reduction activities across portfolio to counter softer market demand.

The company’s adjusted free cash flow guidance lies in the range of $245 million to $285 million for fiscal 2020. Capital expenditure is anticipated between $160 million and $180 million for the fiscal. Investing in existing businesses through maintenance projects and organic growth opportunities remains Greif’s priority in order to support its deleveraging plan.

Price Performance


Year to date, Greif’s shares have gained 2.4%, against the industry’s decline of 20.9%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Sharps Compliance Corp SMED. All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 50% over the past year.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 43% over the past year.

Sharps Compliance has an estimated earnings growth rate of 500% for the ongoing year. In a year’s time, the company’s shares have gained 38%.

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Greif, Inc. (GEF) : Free Stock Analysis Report
 
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