GEF - Greif: Performance And Expectations Are Worsening But The Share Price Remains High

2024-02-01 05:48:58 ET

Summary

• Revenues keep decreasing as volumes are weak, but the IPACKCHEM acquisition should give them a boost in fiscal 2024.
• Gross profit and EBITDA margins remain high, and despite a recent contraction, recent product price raises should stabilize them.
• The debt profile has improved significantly in recent years, although debt will increase in fiscal 2024 as a result of the IPACKCHEM acquisition.
• The dividend remains safe as the company has historically reported low cash payout ratios.
• This represents a good company for long-term dividend investors, but I would wait for a better entry point.

Investment thesis

In August 2020, I wrote an article on Greif (GEF) as the coronavirus pandemic arrived just over a year after the acquisition of Caraustar Industries for $1.8 billion, which caused quite a bit of concern among investors regarding the company's ability to meet the debt incurred in the face of a very uncertain macroeconomic outlook that was not expected at the time of the acquisition. By then, the share price had decreased by ~43% from all-time highs, which I considered a good opportunity for long-term dividend investors as the company has been operating since 1877.

Since then, the share price has increased by 66.43% while the S&P 500 has delivered a return of 38.06%, although the total return for Greif shareholders has actually been 86.13% if we add dividends to the equation. High profit margins and increased demand in fiscal 2021 and 2022 allowed the company to generate strong cash from operations, which was boosted by a reduction in inventories and receivables as well as an increase in payables, and this was decisive for significantly reducing the debt load while making further acquisitions. This, added to the fact that strong pricing power has allowed the company to offset, until now, most of the impacts from inflationary pressures suffered in many industries worldwide, is behind the share price surge experienced since 2020. Despite this, the entire share price increase took place in H2 2020 and 2021 and has remained stagnant since then as the company suffered some margin pressures in fiscal 2022 and weakening demand in fiscal 2023 while expectations for the medium term keep getting worse....

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