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Greif (GEF) Rides on Caraustar Acquisition Amid Debt Burdens

Zacks Equity Research

On Jun 18, we issued an updated research report on Greif, Inc. GEF. The company is poised to gain from the recently-concluded Caraustar acquisition, focus on operational execution, as well 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 are near-term concerns.

Greif reported adjusted earnings per share of 81 cents for second-quarter fiscal 2019, beating the Zacks Consensus Estimate of 79 cents. The figure also improved 7% year over year. Sales climbed 25% year over year from $968.3 million to $1213.3 million.

Caraustar Buyout: A Strategic Fit
This February, Greif completed the acquisition of Caraustar Industries, Inc. for $1.8 billion, and is currently integrating its operations. The buyout has strengthened the company’s leadership in industrial packaging as well as significantly bolstered its margins, free cash flow and profitability. During the April-end quarter, the Paper Packaging segment’s results improved significantly owing to the Caraustar acquisition.

Caraustar is vertically integrated in recycled paperboard manufacturing, which will also fortify and balance Greif's portfolio as well as expand its paper franchise. In fact, Greif generates around half of its revenues from the United States. Furthermore, the percentage of the company’s sales from paper packaging will expand to approximately half of total consolidated revenues. The company has identified $15 million of new estimated run-rate synergies related to this acquisition and estimates that it will be able to achieve at least $60 million of run-rate synergies during the next 36 months from the deal’s closure.
 To include the impact of the acquired business, Greif has updated the adjusted earnings per share guidance for fiscal 2019 to $3.70-$4.00 from the prior estimate $3.60-$4.00. The company will also benefit from its focus on operational execution, capital discipline, and a strong and diverse product portfolio.

In order to support its deleveraging plan, investing in existing businesses through maintenance projects and organic growth opportunities remains Greif’s priority. Moreover, as a result of higher debt, following the Caraustar acquisition, the company will prioritize debt repayment till it achieves the targeted leverage ratio of 2-2.5x net debt to EBITDA.

 Few Hurdles to Cross in FY19
The company believes global macroeconomic conditions to remain choppy through calendar-year 2019. The Paper Packaging & Services business segment will exhibit growth, but at a lower trajectory on a year-over-year comparison.
Rigid Industrial Packaging & Services remained under pressure during the fiscal second quarter due to the prevalent soft demand in global markets. During the quarter, volume weakness was pronounced in West and Central Europe, Asia Pacific region and the U.S. Gulf Coast on account of trade uncertainty and reduced chemical import demand from China. This is likely to continue throughout the current fiscal. Furthermore, currency-exchange rates are anticipated to remain volatile. This will likely be a concern for the Rigid Industrial Packaging & Services segment. Price decline might dampen the segment’s margins before improving in the back half of the calendar year. The segment is also projected to incur restructuring cost in the quarters ahead.
However, during the fiscal, Greif will focus on rationalizing operations and close underperforming assets in the Rigid Industrial Packaging & Services and Flexible Products & Services segments.

Greif, Inc. Price and Consensus

Greif, Inc. Price and Consensus

Greif, Inc. price-consensus-chart | Greif, Inc. Quote

Zacks Rank & Key Picks

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

A few better-ranked stocks in the Industrial Products sector are Chart Industries, Inc. GTLS, Lawson Products, Inc. LAWS and Harsco Corporation HSC, each sporting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Chart Industries has an estimated earnings growth rate of 52.9% for the ongoing year. The company’s shares have gained 18.7%, in the past year.

Lawson Products has an expected earnings growth rate of 24.5% for the current year. The stock has appreciated 46.5% in a year’s time.

Harsco has a projected earnings growth rate of 9.1% for 2019. The company’s shares have rallied 7%, over the past year.

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