Muted Demand And Cost Cuts Will Limit Returns From New Packaging Investments

Catalysts

About Greif

Greif is a global industrial packaging company focused on polymers, metals, fiber based products and closures that serve industrial, chemical, agricultural, mining and paper related end markets.

What are the underlying business or industry changes driving this perspective?

• The company is deploying growth CapEx into higher return end markets such as small plastics capacity in Europe, Africa, India and Singapore. However, this spending is being layered on top of a muted industrial and chemical demand backdrop that may limit pricing power and keep revenue growth below what is implied by the current investment pace, which could pressure future returns on invested capital and earnings.
• Management is leaning heavily on structural cost optimization, including a run rate target of $80 million to $90 million and a 10% professional headcount reduction. Once these savings roll through the P&L, the scope for further easy efficiencies shrinks, which could cap future margin gains and leave EBITDA growth more exposed if volumes do not recover.
• The continued softness in key end markets such as fiber, steel and chemicals, together with existing home sales that management describes as being at very low levels on a population adjusted basis, suggests that packaging demand tied to housing related refurbishing may stay subdued. This could drag on volume and limit revenue growth across metal and fiber offerings.
• Greif is ramping a proprietary barrier technology (SIOC) with new machines in France and other regions. Management explicitly notes that the financial impact for 2026 is not significant, which means current expectations risk getting ahead of the real earnings contribution from this product line for several years.
• The company is committing substantial capital to share repurchases, including completing US$130 million of a US$150 million program and authorizing an additional US$300 million. Combined with historically low leverage, this may constrain flexibility if industrial demand remains muted longer than expected and could increase pressure on free cash flow if EBITDA or margins soften.

Assumptions

This narrative explores a more pessimistic perspective on Greif compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Greif's revenue will remain fairly flat over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.4% today to 6.4% in 3 years time.
• The bearish analysts expect earnings to reach $280.8 million (and earnings per share of $4.83) by about January 2029, up from $186.5 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $320.4 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.0x on those 2029 earnings, down from 18.4x today. This future PE is lower than the current PE for the US Packaging industry at 20.9x.
• The bearish analysts expect the number of shares outstanding to decline by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Greif is pushing growth CapEx into higher return segments like small format plastics in Europe, Africa, India and Singapore, often supported by long term customer contracts. If these projects continue to ramp as management expects, they could support steadier revenue and earnings than a bearish view assumes, especially as capacity is added where return on invested capital is described as coming through almost immediately. This may underpin both EBITDA and net income.
• The company is executing a large structural cost optimization program, with a fiscal 2026 year end run rate target of US$80 million to US$90 million and professional headcount already reduced by 10%. Q1 adjusted EBITDA margin moved to 12.3% with earnings per share up 140% year over year, so if these savings prove durable and still have room to grow, net margins and earnings could stay stronger than expected even if volumes remain muted.
• Leverage is described as historically low at 1.2x with an expectation to remain well below 2x while still funding organic growth and share repurchases. Guidance for adjusted EBITDA of US$630 million and adjusted free cash flow of US$315 million has been reaffirmed, so this balance sheet position may support continued buybacks and dividends, which could support earnings per share and investor sentiment even if end markets are soft.
• Management highlights long term housing related demand as a potential upside, noting that existing home sales are at levels last seen in 1982 on a population adjusted basis, which they view as severely depressed. Any eventual normalization in existing home turnover could lift chemical demand and therefore packaging volumes in metals and polymers more than a bearish case allows for, improving revenue growth and operating leverage.
• Greif is scaling its proprietary SIOC barrier technology, with one machine already operational in France and three more being installed in 2026 followed by additional units. While the near term financial impact is described as not significant, management is very optimistic about the product and early orders are already in place, so if adoption builds over several years this new platform could support mix, gross margins and earnings growth beyond what a pessimistic scenario assumes.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Greif is $60.0, which represents up to two standard deviations below the consensus price target of $76.2. This valuation is based on what can be assumed as the expectations of Greif's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $96.0, and the most bearish reporting a price target of just $60.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $4.4 billion, earnings will come to $280.8 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $72.46, the analyst price target of $60.0 is 20.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.