Berry Global Group, Inc. BERY has failed to impress investors with its recent operational performance, owing to difficult end-market conditions amid the coronavirus outbreak and other woes, which are expected to adversely impact its earnings.
The Zacks Rank #4 (Sell) company has a market capitalization of $7 billion. In the past three months, it has lost 3.2% against the industry’s growth of 9.6%.
Let’s delve into the factors that might continue to take a toll on the firm.
Weak Demand Environment: Berry Global has been experiencing a persistent soft operational performance across its Engineered Materials segment. Notably, in third-quarter fiscal 2020 (ended Jun 27, 2020) the segment’s sales recorded a year-over-year fall of 10.5% owing to weak prices and volume decline. Also, weakness across the company’s automotive and industrial end markets remains concerning for its Consumer Packaging – International segment in the near term. For the fiscal fourth quarter (ended September 2020), it expects sales volume for the Engineered Materials segment to decline in mid-single digits on a year-over-year basis, while that of the Consumer Packaging – International segment is projected to fall in low-single digits.
Escalating Cost Issues: The company has been witnessing rising cost and expenses over the past few quarters. Despite its cost-reduction initiatives, in the second quarter (ended March 2020) and the third quarter of fiscal 2020, the company’s cost of goods sold surged 51.5% and 45.7%, respectively, on a year-over-year basis. In addition, in the fiscal second and third quarters, its selling, general and administrative expenses jumped 42.7% and 58.4%, respectively. Also, in fiscal 2020, the company expects to incur restructuring-related and other costs worth $50 million.
High Debt Level: High debt level has remained a major concern for the company over time. Notably, in the last five fiscal years (2015-2019), its long-term debt increased 25.3% (CAGR). Exiting the third quarter of fiscal 2020, the company’s current and long-term debt was high at $10,760 million. Also, for fiscal 2020, Berry Global predicts interest expenses of $430 million.
Estimate Trend: In the past 60 days, analysts have increasingly become bearish on the company, as evident from negative earnings estimate revisions. Although the Zacks Consensus Estimate for its fiscal 2020 earnings has been stable at $4.51, the same for fiscal 2021 earnings has trended down from $5.15 to $5.08.
However, the company’s diversified business structure has been enabling it to mitigate the adverse impacts of weakness in one end market, with strength across others. Going forward, it is also likely to gain from its focus on improving operational productivity, cost-reduction actions and acquisitions it made over time.
Stocks to Consider
Some better-ranked stocks from the Zacks Industrial Products sector are A. O. Smith Corporation AOS, Regal Beloit Corporation RBC and Rexnord Corporation RXN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
A. O. Smith delivered a positive earnings surprise of 3.56%, on average, in the trailing four quarters.
Regal Beloit delivered a positive earnings surprise of 28.42%, on average, in the trailing four quarters.
Rexnord delivered a positive earnings surprise of 20.62%, on average, in the trailing four quarters.
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