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Berry Global (BERY) Down 17.7% YTD: Will it Bounce Back?

Zacks Equity Research

Berry Global Group, Inc.’s BERY solid product portfolio, acquisitions, growth investments, and business restructuring initiatives are commendable. However, shares of the company have lost 17.7% year to date compared with the industry’s decline of 23.7%. This downside can be primarily attributed to the weak results in 2019 so far on account of soft operational performance across its segments.



What Dragged the Stock Down?

Berry Global’s earnings per share declined 6.3% in third-quarter fiscal 2019 (ended Jun 29, 2019) and remained flat in second-quarter fiscal 2019 (ended Mar 30, 2019), on a year-over-year basis. Weakness in industrial markets coupled with supply disruption related to material qualifications and customer destocking affected the Engineered Materials segment’s organic sales during the first half. In addition, soft North American baby care market, and customer product transitions in hygiene weighed on the Health, Hygiene & Specialties segment’s organic sales.

Additionally, the company continues to witness inflation in raw material, transportation and manufacturing costs. Further, geopolitical risks and headwinds arising from unfavorable movements in foreign currencies on account of its international operations are putting pressure on its profitability. Notably, in the second and the third quarter of fiscal 2019, forex woes had an adverse impact of 1.1% and 0.8% on sales growth, respectively.

Factors Likely to Drive Growth

Berry Global remains focused on solidifying its product portfolio and leveraging business opportunities through acquisition of assets. In this regard, the acquisition of RPC Group (in July 2018) is likely to enhance the company's growth opportunities by creating a leader in the plastic and recycled packaging industry. Also, this buyout will generate annual cost synergies of $150 million. Moreover, the company’s buyout of Laddawn (in August 2018), has been strengthening the Engineered Materials segment through the enhancement of sales generating capabilities in the core films market. In addition, the Clopay Plastic Products Company buyout (in February 2018) has been solidifying Berry Global's Health, Hygiene & Specialties segment.

The company has a balanced capital allocation strategy. Repaying debts, improving organic growth opportunities, reducing costs and share buybacks are the main areas where capital is used. Notably, the company used $383 million for repaying long-term debts in the first three quarters of fiscal 2019. Higher cash flow will effectively support the company's capital-allocation strategies. For fiscal 2019 (ending September 2019), its adjusted free cash flow is predicted to be $670 million. Moreover, for fiscal 2020 (ending September 2020), the company anticipates cash flow from operations of $1,400 million, capital expenditure of $600 million and free cash flow of $800 million.

Further, the Zacks Rank #3 (Hold) company has undergone certain business restructuring initiatives, which will help it in offering better services to customers and enhance shareholders' value. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some of Berry Global’s peers that have significantly outperformed the company are UFP Technologies, Inc. UFPT, AptarGroup, Inc. ATR and Sealed Air Corporation SEE, which have gained 39%, 29.9% and 14.3%, respectively, year to date.

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