If you're a company with hefty exposure to industrial markets, these are uncertain times. If you're a company with hefty exposure to European markets, these are scary times. Perhaps it's not so surprising, then, that Greif (NYSE:GEF), a manufacturer of industrial packaging products like steel and plastic drums, is near its 52-week low. With European chemical companies seeming a little more optimistic about the second half of the year, though, maybe this is a stock to consider as a rebound/recovery play.
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Disappointing Results in the Second Quarter
Greif reported 4% revenue growth in the fiscal second quarter, as acquired volume and a slight price increase boosted results. Organic growth was less powerful, though, as the company saw organic sales decline 3%. Greif's rigid packaging saw a 5% organic volume decline, while the flexible packaging business saw an overall sales decline of 16%.
With the company struggling to maintain organic volume, it's not surprising that operating leverage proved elusive. Gross margin fell more than a point, while operating income dropped about 19%.
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Still Hope for a Second-Half Rally?
With an 80% exposure to industrial end markets and a 50% exposure to Europe, it's no mystery where Greif's bread is buttered. The question is whether those markets come through with the second-half rebound that so many sell-side analysts have been predicting.
The European chemical sector is giving some reason for optimism. Companies like BASF, Akzo Nobel, Solvay and DSM collectively seem relatively optimistic that conditions will improve later in the year. At the same time, American chemical companies like DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW) seem to be seeing solid volume trends as input costs and demand are relatively favorable. What's more, monthly rail traffic data has been pretty supportive of the idea that overall industrial demand is solid (albeit not spectacular) in North America.
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A Tough Neighborhood in the Best of Times
While Greif has some interesting rebound potential, investors shouldn't kid themselves about the nature of the business. The broader range of packaging companies like Greif, Sonoco (NYSE:SON) and Sealed Air (NYSE:SEE) generally struggle to post appealing long-term returns on capital, as it is so difficult to develop any sort of proprietary product that can sustain attractive margins for any length of time. Accordingly, this is a pretty typical "buy when things are awful, sell when things look good" story and that runs contrary to the instincts of most investors.
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The Bottom Line
Greif is currently trading below its long-term valuation averages. Investors who believe that the economy will rebound in the second half may well find this to be a good leveraged play to that economic recovery. On the flip side, this is not a name for long-term holders and investors with less confidence in the economy would probably do well to stay clear of it.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.