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Greif Strong on Caraustar Acquisition Amid Debt Burdens

Zacks Equity Research

On Oct 14, we issued an updated research report on Greif, Inc. GEF. The company is poised to gain from focus on operational execution and cost-reduction activities. Its strong and diverse product portfolio and the Caraustar acquisition will also drive growth.

Upbeat Outlook for 2019 Despite Headwinds

Greif’s adjusted earnings per share guidance for fiscal 2019 is pegged between $3.70 and $4.00. The mid-point of the guidance suggests year-over-year growth of 6.6%. Demand for containerboard is expected to improve in the current year. The outlook also reflects impact of the acquired Caraustar business. Greif will also benefit from focus on operational execution, capital discipline, and a strong and diverse product portfolio. The company continues to execute cost-reduction activities across its portfolio to counter a softer market demand.

The Rigid Industrial Packaging & Services segment’s performance was affected in the fiscal third quarter due to the prevailing soft demand in global markets. Volume weakness was pronounced in West and Central Europe, the Asia-Pacific region and the U.S. Gulf Coast, on account of trade uncertainties and reduced chemical import demand from China. This is likely to continue in the balance of fiscal 2019 as well. Currency-exchange rates are anticipated to remain volatile. This will weigh on Greif’s results in fiscal 2019.

The Zacks Consensus Estimate for Greif’s fiscal 2019 earnings is currently pegged at $3.81, indicating an improvement of 7.93% from the year-ago quarter.
Restructuring Activities to Fuel Growth

Greif’s restructuring activities will focus on rationalizing operations and closing underperforming assets in the Rigid Industrial Packaging & Services and Flexible Products & Services segments. Moreover, investing in existing businesses through maintenance projects and organic growth opportunities remain Greif’s priorities in order to support deleveraging plan.

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 its margins, free cash flow and profitability. 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 $65 million of run-rate synergies by the end of fiscal 2022. Notably, Greif generates approximately half of revenues from the United States. Furthermore, the percentage of Greif's sales from paper packaging will expand to approximately half of total consolidated revenues.

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

Price Performance

Year to date, Greif’s shares have gained 1%, against the industry’s decline of 22.3%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Atkore International Group Inc. ATKR, Cintas Corporation CTAS and Sharps Compliance Corp SMED, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Atkore International Group has a projected earnings growth rate of 19.8% for the current year. The stock has gained 57.3% so far this year.

Cintas has an estimated earnings growth rate of 12.74% for 2019. Shares of the company have rallied 58.3% year to date.

Sharps Compliance has an estimated earnings growth rate of a whopping 500% for 2019. The company has rallied 20.6% so far this year.

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