Some investors like high flying technology companies while others prefer more mundane business models. Industrial packaging leader Greif (NYSE:GEF) falls into the latter category.
The Ohio-based company sells a range of rigid, flexible, and paper packaging products to a broad group of industries. It's not likely to be a business that gets your blood boiling, but that doesn't mean its not a good investment. In fact, there's a lot to like about Greif.
Greif has established itself has the packaging company of choice for thousands of enterprises. Its longstanding customer relationships have helped it earn the top market share in the global packaging product and services industry.
Greif's solutions-based approach differentiates it in the market and drives healthy free cash flow generation. Both the fundamental quality and technical picture suggest a breakout may be near.
What Makes Greif a Good Investment?
Greif's most attractive investment attribute is its exposure to a wide variety of end markets. Its customers are in over 40 countries and include petroleum, chemical, pharmaceutical, agricultural, and food companies. Together they buy all sorts of steel, fiber, and plastic drums and tubes for their transportation and storage needs.
The diverse customer base and expansive product portfolio make for an attractive business model. Free cash flow generation is strong, and the company pays a sizeable dividend. The 4.6% dividend yield and modest mid-single digit revenue growth is a nice combination.
Greif is kind of a sneaky way to play some of the most compelling macro investment themes. Sustainability and multi-use packaging are hot topics and expected to drive greater use of reusable and recycled paper and plastic-based containers. Increased attention on food safety should also lead to growth opportunities in the food and beverage segments.
Meanwhile, we are seeing accelerated e-commerce growth in the wake of the pandemic. This is driving increased consumer demand for all sorts of goods which means there is a need for more corrugated carboard and other shipping materials. Greif should be a beneficiary of continued growth in both consumer and b2b e-commerce.
Most of Greif's revenue comes from outside North America. It has significant exposure to emerging markets. The company has put itself in a good position to benefit from the rise of the middle-class consumer in developing economies. As living standards improve, increased consumption of food, pharmaceuticals, and other goods along with government spending on infrastructure should provide a major boost to Greif's business.
The packaging industry is a highly fragmented business. Greif's strong global presence positions it to capitalize on inorganic growth opportunities as well. Its recent buyout of Caraustar made it the world's leading paperboard manufacturer and is on track to generate at least $70 million of annual synergies by 2022.
How is Greif's Balance Sheet Strength?
Greif's balance sheet is in fairly good shape but has room for improvement. It has sufficient liquidity with a $72 million cash balance and $690 million of undrawn credit facilities. It also sits on approximately 245 acres of timber that could be monetized if necessary.
The company has made balance sheet deleveraging a priority. It is aiming to reduce its leverage ratio from 3.6x to between 2.0x and 2.5x by 2023. Success on this front would make it a more appealing investment because it would potentially lead to a dividend hike.
It could also give Greif the flexibility to pursue consolidation opportunities across higher growth end markets. Management has discussed plans to grow the business through "material M&A" once it reaches its target leverage ratio.
This may include investments geared toward containerboard integration and intermediate bulk containers (IBCs) - reusable, bulk storage containers used to ship paint, solvents, oils, food, and other goods. IBCs are becoming popular across multiple industries for their efficient use in transport and storage.
What about Greif's Technicals?
On August 7th, when the stock closed at $39.08, Greif's chart formed a bullish bottom triangle pattern. The intermediate pattern suggests that Greif's share price may trend towards the $52 to $55 range over the next couple of months.
In recent days, the stock has pulled back near its 50 and 200-day moving averages offering a good entry point for investors.
The company is scheduled to report fiscal third quarter earnings after the market close on August 26th. Its results are likely to reflect early signs of success with its growth levers. E-commerce-related demand should be especially noteworthy and could drive a significant beat of the $0.88 consensus earnings estimate.
At 11x forward earnings, Greif is the package deal for growth and income investors. The company has a leading position in several packaging materials. Its diversification along product breadth, end market, and geographic lines offers stability. There are multiple opportunities for low-risk growth and margin expansion in the next few years.
In the weeks ahead, look for Greif's stock to break through the resistance around $39 and for its forward earnings multiple to expand towards its historic average of 14x.
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