Synopsis

Greif, Inc (NYSE:GEF) is a leading producer of industrial packaging products and services. It has experienced weakening customer demand patterns in FY23 and anticipated that it will continue through 2024. Despite some weakness in its revenue growth over the past few years, GEF has consistently demonstrated robustness in its profitability margins. To combat rising raw material prices, GEF has taken action to implement price increases on its products. With its pipeline of margin-accretive acquisitions and organic investments to drive growth, GEF has further upside potential as it expands its geographical footprint and product offerings to combat weakening demand. These growth catalysts have led me to a buy rating, as I believe that it should outperform in the foreseeable future.

Revenue Segment

GEF has a comprehensive product line of industrial packaging products and other related services. As of FY23, the Global Industrial Packaging [GIP] segment accounted for 56% of its net sales, the Paper Packaging & Services [PPS] segment accounted for 43%, and Land Management accounted for the remaining small portion. GEF typically manufactures steel, fibre, and plastic drums, jerrycans, intermediate bulk containers, closure systems for industrial packaging, and other products. Mostly steel and plastic material solutions. They also provide container life cycle management, logistics, and other packaging services. Its end-market includes customers from various industries, such as petrochemicals, pharmaceuticals, specialty chemicals, agriculture, and various others. GIP has a global product portfolio, covering regions in North America, EMEA, LATM, and APAC. The PPS segment caters to a diverse range of industries in North America, including those in the packaging, automotive, food, and building industries. Products include containerboard, paperboard, and other corrugated products.

Historical Financial Analysis

GEF's year-over-year revenue growth has experienced some fluctuation, with the strongest revenue growth of 23.06% in FY21 and a significant drop of -17.83% in FY23. Net sales fell from $6.349 billion to $5.218 billion, with a significant portion of the decrease due to a reduced average selling price and a decline in volume across all of GEF’s two main segments: GIP and PPS. GEF's sales of approximately 50% equity interest in Flexible Products & Services in FY22 contributed to a $148.8 million reduction in net sales. Management expects this weakness in customer demand patterns to roll into FY24.

In terms of profitability margin, GEF’s adjusted EBITDA and net income margins have been robust throughout the year. Despite a double-digit decline in net sales in FY23, GEF has shown improvement in both its net income and adjusted EBITDA margins. Over the years, the adjusted EBITDA margin has improved, increasing from 13.80% in FY21 to 15.70% in FY23. Although net income margins decreased from 7.40% in FY21 to 7.30% in FY23, there was a significant improvement compared to FY22. SG&A expenses have fallen by 5.5%, from $581 million in FY22 to $549.1 million in FY23.

Second Quarter Earnings Analysis

Despite a slight increase in net sales of ~4.74% in 2Q24, GEF’s net income has fallen by ~60% year-over-year. The increase in net sales is primarily due to recent acquisition contributions, with both GIP and PPS segments experienced higher volume this quarter. This slight increase was partially offset by PPS’s lower average selling price.

Furthermore, there has been a decline in gross profit by ~13% due to rising raw materials, transportation costs, and manufacturing costs. SG&A has increased by ~21% due to higher costs incurred related to compensation, strategic investment, and its recent acquisitions. As GEF completed its acquisition of Ipackchem, net debt increased from $589.4 million to $2.72 billion, driving up the leverage ratio to 3.44x this quarter from 2.53x in 1Q24. Given the current leverage ratio, GEF will prioritise short-term debt reduction.

Both segments have experienced margin compression, particularly the PPS segment. The GIP segment faced a slight margin compression of 1.5%. However, the PPS segment's adjusted EBITDA margin has fallen by more than ~10%, from 18.90% to 8.7%. This is primarily due to rising input costs and the continued delay recognition of pricing increase.

Pipeline of Margin Accretive Acquisitions

GEF has a robust acquisition pipeline set to drive growth with a programmatic approach. It has allocated over $1 billion for acquisitions in FY23. In 2023, GEF engaged in numerous acquisition activities, including the acquisition of Lee Container Corporate Inc., Reliance Products, and an increase in ownership of Centurion Container LLC and ColePak. Not only do these acquisitions expand GEF’s product line in small plastics market, but they also expand GEF’s exposure in stable end-markets such as the food and beverage and pharma markets. Smaller plastic packaging businesses typically have higher margins than larger ones due to the highly fragmented nature of the market. In the small plastic market, GEF operates in the premium market, where a more sophisticated and advanced production requirement would demand higher margins.

Recently, GEF completed its $582 million acquisition of Ipackchem on March 26. Ipackchem is a global market producer of high-performance and high-margin rigid plastic barrier packaging, specialising in containers for high-value markets such as flavours, fragrances, and agrochemicals. The small plastics market has an addressable market of ~$3 billion, and it is slowly expanding annually. By acquiring Ipackchem, GEF can expand its reach within this addressable market, positioning itself favourably in these secular growth markets. Once integration is complete, GEF anticipates capturing approximately $7 million in synergies. These opportunities include raw material procurement advantages and eliminating leadership overlap. Therefore, this acquisition aligns with GEF’s goal to be the global leading producer of high-performance, high-margin small plastic containers and jerry cans.

Another Price Increase Implementation

In response to rising raw material, energy, labour, and transportation costs, GEF has announced another implementation of a price increase for all grades of Uncoated Recycled Paperboard [URB] by $50 to $70 per ton. This would be effective after July 8th. In addition, there will also be a minimum 6% increase for tube, core, and protective packaging products, which will be effective on July 15th. GEF had a similar implementation in January 2024, where it announced a $40 to $70 per ton increase for URB and a minimum 6% price increase for tubes, cores, and protective packaging products.

Despite its flattish revenue this quarter, GEF's 2Q24 PPS segment has been experiencing margin compression of over 10%, from 18.9% to 8.7%, in comparison to the prior quarter. The delayed recognition of price increases and existing rising costs resulted in significant margin compression in 2Q24. These price increases are aimed towards better alignment of prices with the current inflationary market environment and cost structure. Therefore, we can expect to see margin improvement and upside in overall financial performance in the latter half of FY24.

Expanding Scale & Efficiency of High Margin Products

GEF has opened its new bulk corrugated manufacturing facility in Dallas, Texas. Management is expecting this Dallas Sheetfeeder project to generate at least $2 million in EBITDA per month once it is fully functional. This manufacturing facility is focused on the production of triple wall sheets and jumbo boxes, which is set to enhance GEF’s capacity in the bulk corrugated business in the South, Southwest, and Mexico. Outfitted with advanced automated machinery, this facility will allow GEF to respond quickly to customer demands, ensuring excellent lead times and high product quality.

Relative Valuation Model

GEF competes in the global industrial packaging, containerboard, and other paper packaging industries. I will be comparing GEF’s growth outlook and profitability margin trailing twelve months [TTM] against its peers that operate in the same or similar industries.

Across the list, we can see that its peers have a negative outlook, reflecting a weak outlook in this industry. In terms of growth outlook, GEF has the weakest forward revenue growth rate of -3.20%, the weakest amongst its peers. Its net income margin TTM is 5.17%, 0.93x the peers’ median of 5.56%. GEF has shown the strongest EBITDA margin TTM of 20.39% among its peers, 1.38x the peers’ median of 14.81%, reflecting its stronger operational efficiency.

GEF forward P/E ratio is currently trading at 13.78x, which is lower than its peers’ median of 17.20x. Given GEF’s weak growth outlook compared to peers, it is fair for GEF to be trading at a discount compared to them. The market revenue estimate for FY24 is $5.43 billion, with an EPS of $4.41. For FY25, the market revenue estimate is $5.76 billion, with an EPS of $5.16. In addition, GEF revised their EBITDA guidance for FY24, marking a ~14% increase in EBITDA from $610 million to $675-$725 million. The growth catalyst previously discussed justifies these market estimates. By applying my target PE of 13.78x to the 2025 EPS estimate, my target price is $71.10, reflecting a 17% upside potential.

Risks And Conclusions

Management has experienced a low demand pattern in 2023 and anticipates it to extend to FY24. Furthermore, GEF sources its raw materials from highly competitive and price-sensitive markets. Its price increase implementation on the product may not fully offset higher raw material costs, which would impact overall profitability. Given its highly competitive industry, GEF's peers may be able to absorb some of the rising costs, which would backfire on GEF's price increase implementation and result in a loss of market share.

However, it is important to note that GEF has acquired various margin accretive companies, which would expand its product offerings and reach across North America, EMEA, LATAM and APAC. This would mitigate GEF’s concern regarding the weaker customer demand pattern. Given GEF's margin accretive acquisitions and actions taken to combat rising material costs, I recommend a buy rating for it.