Greif Downgraded Following 75% Run In 2016

While there are “encouraging signs of improved execution under the new leadership of Pete Watson,” the recent run-up in the shares of Greif, Inc. (NYSE: GEF) leaves the valuation looking “rich,” BMO Capital Markets’ Mark Wilde said in a report. He downgraded the rating on the company from Market Perform to Underperform, while raising the price target from $36 to $48.

Greif reported its Q4 FY 2016 EPS at $0.65 and guided to its FY 2017 EPS at $2.78–$3.08. The mid-point of the guidance range implies a year-over-year gain of $0.49 or 20 percent growth.

Paper Packaging

“Industry volumes have rebounded smartly in recent months and GEF's CorrChoice corrugated sheet business is outpacing the industry,” analyst Wilde wrote. Greif projected a pricing hike of $40 per ton by the end of January. The BMO estimate for EBITDA and net realization for 2017 are at $134 million and $30 per ton, respectively.

Rigid Packaging

Margins at rigid packaging are improving. The company is exhibiting improved execution, although global demand remains choppy, Wilde mentioned.

Flexible Packaging

Greif reported the first EBIT positive quarter for flexible packaging since Q1 FY 2014. However, the segment continues to be under pressure.

“Paper Packaging fundamentals are encouraging and GEF is fixing its core business, Rigid Packaging. However, with the stock trading at 8.5x our 2017E EBITDA and an uneven global economy, we are downgrading GEF to Underperform,” the analyst wrote.