Although industrial packaging company Greif (NYSE:GEF) has compelling share in categories like steel and plastic drums, as well as multiwall bags, and a solid long-term plan for boosting margins, this year has ended on a sour note. With sales in Europe down significantly, Greif is going to have to reestablish its credibility with the Street. Should it do so, though, there could be worthwhile rewards here for patient investors.
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A Sour End to the Year
Arguably the best that can be said about Greif's fiscal fourth quarter is that it didn't surprise anyone, as the company had warned the Street back in late November. Revenue rose 14% as reported, but organic growth was basically nonexistent, as declines in comparable volume erased some price increases. Although reported revenue growth in the industrial packaging business came in at 15%, the real result was basically zero, while there was real revenue growth in the much smaller flexible packaging business.
Profitability was better than Greif had warned, but not so good on an annual comparison. Gross margin fell more than two and a half points, with the industrial business showing the worst performance. Operating income fell 21% as reported, with both industrial and paper packaging segments doing even worse. (To know more about income statements, read Understanding The Income Statement.)
How Fast Can Europe Recover?
Greif gets more than a third of its revenue from Europe, and that's a problem. Global companies like Siemens (NYSE:SI) and BASF (OTCBB:BASFY) are doing well enough, but regional and local European players are having a tougher time of it. Given that packaging is a derived demand industry, there is not much that the company can do other than to make sure rivals like Mauser and Schultz don't grab share.
Worse still, industrial packaging is more of a boom/bust market than consumer packaging. Companies like Ball (NYSE:BLL), Bemis (NYSE:BMS), Sealed Air (NYSE:SEE) and Silgan (Nasdaq:SLGN) just don't see the same sort of drops in demand for cola, beer and toothpaste, as the economic cycle plays out.
Still Some Room for Improvement
Although the industrial packaging business is having its challenges, the company is moving ahead with its plans to improve performance in the flexible packaging business. Greif has ambitious goals to double revenue and margins in this business, and it is worth noting that there was legitimate revenue and margin growth in this segment during this quarter.
Should Greif Monetize Other Assets?
Although Greif gets most of its revenue from rigid and flexible industrial packaging, it has other operations. The company is a bit player in paper markets like containerboard and corrugated packaging, well behind companies like International Paper (NYSE:IP), Rock-Tenn (NYSE:RKT) and Packaging Corp of America (NYSE:PKG) in terms of market share, and depending on recycled materials, to a much larger extent. Given the wave of consolidation in this space, maybe selling these operations should be explored.
Likewise, the company owns about 300,000 acres of timberland; perhaps the company could garner more value from selling that land and putting the money towards debt reduction or further tuck-in acquisitions.
The Bottom Line
Whether its pursuing additional deals or exploring the potential of markets, like steel drum reconditioning and additional flexible packaging products, Greif has legitimate possibilities for growth. Combine that with the hoped-for improvements in margins and there could be significant earnings potential in the coming years. That all rests, of course, on healthy end-user markets and that doesn't seem like a slam-dunk right now.
Assuming mid-single-digit revenue growth and some modest margin improvement, Greif is almost (but not quite) cheap enough to think about buying today. That's giving the company only partial credit for potential sales and margin improvements, but until the company can get back on track with positive quarters and upward guidance revisions, that seems like the safer way to play it today. (For more, see Earning Forecasts: A Primer.)
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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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