Greif Inc.’s GEF strong and diverse product portfolio, and focus on operational execution and cost reduction are commendable. However, shares of this producer of industrial packaging products have lost 20.5% year to date compared with the industry’s decline of 5.2%. This downside can primarily be attributed to weak demand amid the coronavirus crisis and a sluggish industrial manufacturing environment.
What’s Hurting the Stock?
The company’s share price has slumped 11% since reporting third-quarter fiscal 2020 results on Aug 26, 2020. Adjusted earnings per share was 85 cents, reflecting year-over-year plunge of 32.5%, thanks to soft industrial conditions across its global portfolio, and the pressure of price and cost on the paper business.
Anticipating volatile global macroeconomic conditions throughout the remainder of fiscal 2020, Greif expects adjusted earnings per share between $3.00 and $3.20. The mid-point of the guidance indicates a slump of 22% from the prior year. Notably, the Zacks Consensus Estimate for fiscal 2020 earnings per share is pegged at $3.12, suggesting a decline of 21% from the prior year. The estimate has gone down 6% over the past 30 days.
The company is also witnessing sluggish demand within the textile, industrial paints, coatings and lubricant industries on account of the coronavirus crisis. Around 60% of the Rigid Industrial Packaging & Services segment’s revenues are generated from steel drums. The ongoing volume declines in steel drums will continue to hinder the segment’s results.
Is a Rebound Likely?
Greif continues to witness 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. The company will also continue to benefit from focus on operational execution, capital discipline, and a strong and diverse product portfolio. In fact, in the wake of the coronavirus-induced crisis, Greif has initiated variable cost reduction plans, which include plant rationalization, furloughs and shift reductions.
In February 2019, the company completed the acquisition of Caraustar Industries, Inc. and is currently integrating its operations. The buyout reinforced Greif’s leadership in industrial packaging and significantly bolstered margins, free cash flow and profitability. In fiscal 2020, the Paper Packaging segment is likely to benefit from the Caraustar acquisition and various new capital growth projects coming online, which include a new corrugated sheet feeder in Palmyra, PA.
Per the Institute for Supply Management’s latest report, the U.S Purchasing Managers’ Index (PMI) came in at 56% for August, following 54.2% in July and 52.6% in June. This was the biggest expansion in the manufacturing sector since November of 2018 as August marked the first full month of operations. Considering that the PMI was consistently below 50 (which denotes contraction) during March to May, the recovery over the past three months instills optimism. A pick up in the industrial sector will be beneficial for Greif.
We believe that these factors will eventually benefit the company’s results and aid its shares post a turnaround.
Zacks Rank & Key Picks
Greif currently carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the Industrial Products sector include SiteOne Landscape Supply, Inc. SITE, Fortune Brands Home Security, Inc. FBHS and Cintas Corporation CTAS. All of these stocks sport a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
SiteOne Landscape has an expected earnings growth rate of 18.5% for the current year. The stock has appreciated 62% in a year’s time.
Fortune Brands Home has a projected earnings growth rate of 6.2% for 2020. The company’s shares have gained 59% in a year.
Cintas has an estimated earnings growth rate of 1.4% for the ongoing year. The company’s shares have rallied 27% over the past year.
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