We issued an updated research report on Berry Global Group, Inc. BERY on Jul 8.
The packaging products manufacturer currently carries a Zacks Rank #3 (Hold) and has a market capitalization of approximately $7.2 billion.
Below we discussed why it will be prudent for investors to hold on to this stock for now.
Factors Favoring Berry Global
Sound Capital Allocation Strategy: The company has a balanced capital allocation strategy. Repaying debts, making acquisition (detailed below), improving organic growth opportunities and share buybacks are main areas, where capital is used. Notably, Berry Global used $122 million for repaying long-term debts in the first half of fiscal 2019 (ended Mar 30, 2019).
Higher cash flow will better support the company’s capital allocation strategies. For fiscal 2019 (ending September 2019), its cash flow from operations is predicted to be $1,036 million, capital expenditure to be $350 million and adjusted free cash flow to be $670 million.
Buyouts: Berry Global seems to favor acquisitions to fortify its product portfolio. It acquired Clopay Plastic Products and Laddawn in fiscal 2018 (ended September 2018), adding vigor to its Health, Hygiene & Specialties; and Engineered Materials segments, respectively.
Recently, the company acquired RPC Group. Berry Global believes that this buyout will enhance growth opportunities by creating a leader in the plastic and recycled packaging industry. The combined entity will operate across 290 locations globally and employ roughly 48,000 people. Revenues will be approximately $13 billion while annual cost synergies are predicted to be $150 million.
Restructuring of Segments & Share Price Performance: Post the RPC Global buyout, Berry Global restructure its business segments to offer better services to customers and enhance shareholders’ value.
Currently, the company has four business segments — Health, Hygiene, and Specialties; Consumer Packaging – International; Engineered Materials; and Consumer Packaging – North America. Earlier, it had three segments — including Engineered Materials; Health, Hygiene & Specialties; and Consumer Packaging.
In the past six months, the company’s share price has gained 11.2% against the industry’s decline of 16.5%.
Factors Working Against Berry Global
Weakness in Top Line: In the second quarter of fiscal 2019 (ended Mar 30, 2019), Berry Global’s revenues declined 0.9% year over year (or down 3.7% organically). Weaknesses in Health, Hygiene & Specialties; and Engineered Materials segments adversely impacted results.
Softer demand, lower resin prices and unfavorable currency impact might continue hurt segmental sales in the quarters ahead.
Forex Woes: Geographical diversification is reflective of a flourishing business of the company. However, this diversity exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the second quarter of fiscal 2019, forex woes adversely impacted the company’s sales growth by 1.1%. Persistence of such headwinds will continue impacting its top-line results.
High Debts: We believe that a highly leveraged balance sheet can be troubling for Berry Global. Exiting the second quarter of fiscal 2019, the company's current and long-term debt was $5,727 million. We believe that rising debt, if unchecked, will increase its financial obligations and might prove detrimental to its profitability in the future.
For fiscal 2019, the company continues to anticipate interest expenses of approximately $270 million, higher than $259 million recorded in fiscal 2018.
Stocks to Consider
Some better-ranked stocks in the Zacks Industrial Products sector are Roper Technologies, Inc. ROP, Chart Industries, Inc. GTLS and RBC Bearings Incorporated ROLL. While Roper currently sports a Zacks Rank #1 (Strong Buy), both Chart Industries and RBC Bearings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 30 days, earnings estimates for all these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 8.43% for Roper, 16.56% for Chart Industries and 8.36% for RBC Bearings.
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