Is Greif Inc Stock Worth the Grief After Weak Guidance?

Source: Thinkstock

Source: Thinkstock

Greif Inc (NYSE:GEF) caught my eye after missing top and bottom line estimates. But should you sell this stock which has returned just 25 percent in two years? Despite the earnings and revenue misses, there were some bright spots.

The company produces and sells industrial packaging products worldwide and operates in several segments. The company’s Rigid Industrial Packaging and Services segment provides rigid intermediate bulk containers, closure systems, transit protection products, water bottles, and reconditioned containers, as well as steel, fiber, and plastic drums; and container lifecycle, blending, filling and other packaging, logistics, and warehousing services. This segment sells its products to customers in the chemicals, paints and pigments, food and beverage, petroleum, industrial coatings, agricultural, pharmaceutical, mineral, and other industries. Its Flexible Products and Services segment offers flexible intermediate bulk containers and related services.These are sold and used to ship a range of industrial and consumer products, such as seed, fertilizers, chemicals, concrete, flour, sugar, feed, pet foods, popcorn, charcoal, and salt primarily in the agricultural, chemical, building products, and food industries. The company’s Paper Packaging segment provides container board, corrugated sheets, corrugated containers, and other corrugated products to customers in packaging, automotive, food, and building products industries. Finally, its Land Management segment is engaged in the harvest and regeneration of timber properties; and sale of timberland and special use land.

The numbers were so-so for the quarter. Net sales were $1.101 billion for the second quarter of 2014 compared with $1.089 billion for the second quarter of 2013. The 1.1 percent increase in net sales was primarily due to the impact of a 2.3 percent increase in selling prices. The higher selling prices were primarily for rigid industrial packaging products in North America, partially as a result of the pass-through realization of higher raw material costs, and for paper packaging products. Volumes in Europe within the Rigid Industrial Packaging and Services segment were higher than a year ago. Gross profit was $204.2 million for the second quarter of 2014 compared with $202.6 million for the second quarter of 2013. Improvements in the Rigid Industrial Packaging and Services and Paper Packaging segments were offset by declines in the Flexible Products and Services and Land Management segments. Gross profit margin was 18.6 percent for the second quarters of 2014 and 2013.

Operating profit was $74.6 million for the second quarter of 2014 compared with $83.9 million for the second quarter of 2013. The $9.3 million decrease consisted of an $11.1 million decrease in the Flexible Products and Services segment and a $6.0 million decrease in the Rigid Industrial Packaging and Services segment, partially offset by a $7.0 million increase in the Land Management segment and a $0.8 million increase in the Paper Packaging segment. Unadjusted earnings were $116.2 million for the second quarter of 2014 compared with $122.0 million for the second quarter of 2013. The $5.8 million decrease was primarily due to costs incurred due to the occupation of a flexible products manufacturing facility. Unadjusted earnings before special items was $112.2 million for the second quarter of 2014 versus $122.0 million for the second quarter of 2013. Depreciation, depletion and amortization expense was $41.9 million for the second quarter of 2014 compared with $38.9 million for the second quarter of 2013.

What troubled me besides the so-so sales numbers is that general expenses increased 11.1 percent to $135.4 million for the second quarter of 2014 from $121.9 million for the second quarter of 2013. This was primarily related to higher professional fees, higher amortization expenses related to intangible assets and scalable business platform expenses. Expenses were 12.3 percent of net sales for the second quarter of 2014 compared with 11.2 percent of net sales for the second quarter of 2013.

Further troubling is that cash provided by operating activities was $102.7 million for the second quarter of 2014 compared with $107.8 million for the second quarter of 2013. Free cash flow was $71.3 million for the second quarter of 2014 compared with free cash flow of $85.4 million for the second quarter of 2013. Overall, the net income attributable to Greif, Inc. was $35.8 million, or $0.61 per diluted share versus net income attributable of $40.2 million, or $0.69 share for the second quarter of 2013.

Speaking about the quarter, David B. Fischer, president and chief executive officer stated, “Our Paper Packaging segment achieved record second quarter operating profit; however, our quarterly results were adversely impacted by a prolonged, illegal occupation at the Hadimkoy, Turkey flexible products manufacturing facility and severe weather-related conditions that significantly affected two of our business segments. As a consequence, second quarter financial results were below our expectations; however, specific actions are being implemented companywide to strengthen our business portfolio, including certain non-core asset sales and initiatives to realize cost savings and address underperforming assets. We look forward to stronger performance in the second half of fiscal 2014.”

Is the stock a sell on this news? I don’t think so. I think it is prudent to hold the stock to see if management can work out its issues. Looking ahead, it is going to be more of the same. Slow economic growth for fiscal 2014 will likely result in moderate sales volume improvement and slightly higher raw material costs in certain regions. The Rigid Industrial Packaging segment is anticipated to benefit from moderate volume growth, especially in Europe, and Greif Business System cost savings. The company indicates that specific actions will be implemented in the Flexible Products segment during the second half of 2014 as this business is repositioned for sustainable growth and profitability.

Additionally, the company is pursuing the sale of select non-core assets and plans to accelerate restructuring actions. Based on these factors, including anticipated gains from the sale of select non-core assets, fiscal 2014 earnings guidance is $475 million to $505 million or earnings per share guidance of $2.48 to $2.80. While the company transitions, I recommend holding the stock.

Disclosure: Christopher F. Davis holds no position in Greif Inc.and has no intentions of initiating a position in the next 72 hours. He has a hold rating on the stock and a $55 price target.

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