Asset Sales And Cost Initiatives Will Reduce Debt And Strengthen Financial Position

Key Takeaways

• Cost optimization and facility closures aim to enhance margins, profitability, and efficiency, positively impacting EBITDA and cash flow.
  
• Strategic divestitures and focus on high-growth markets intend to improve balance sheet, EPS, and revenue from outperforming segments.
  
• Tariff uncertainties, declining demand, and increased expenses may pressure Greif's profitability and earnings, despite strategic supply channels and SG&A allocations.

Catalysts

Engages in the production and sale of industrial packaging products and services worldwide.

• Greif's ongoing $100 million cost optimization initiative is expected to improve net margins and drive profitability, ultimately enhancing EBITDA margins and free cash flow conversion toward their long-term targets of 18% EBITDA margin and 50% free cash flow conversion.
  
• The anticipated volume recovery, as part of Greif's enhanced business model, is expected to accelerate once the industrial economy begins to recover, which could positively impact revenue and EBITDA.
  
• Greif's intention to sell its timber portfolio, and use the proceeds to reduce debt, is aimed at improving the balance sheet and potentially enhancing earnings per share (EPS) through reduced interest expenses.
  
• The closure of underperforming facilities is projected to become EBITDA positive by 2027 due to increased efficiency from redeploying production to more efficient facilities, which will likely enhance overall profitability.
  
• Focus on GDP-plus growth markets, such as agrochemicals and pharmaceuticals, is expected to drive revenue growth as these segments outperform Greif's legacy business in terms of volume growth.

Greif Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Greif's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 5.5% in 3 years time.
• Analysts expect earnings to reach $325.7 million (and earnings per share of $5.09) by about March 2028, up from $210.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2028 earnings, up from 12.6x today. This future PE is lower than the current PE for the US Packaging industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 0.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.74%, as per the Simply Wall St company report.

Greif Future Earnings Per Share Growth

Risks

• Tariff uncertainties could impact Greif's profitability despite having local supply channels, as any potential increases may still affect material costs and negatively influence net margins.
  
• The closure of two paper mills will initially lead to a $3 million EBITDA headwind in fiscal '25 due to closure costs and operational shifts, affecting short-term earnings.
  
• Declining demand in North American markets and uncertain volume recovery could pressure revenues if industrial economic conditions do not improve.
  
• The increased allocation of SG&A expenses to high-margin segments can skew profitability perceptions and could impact net margins if not managed effectively.
  
• Higher interest expenses resulting from acquisitions and debt could impact net earnings until leverage is reduced via asset sales or increased operational cash flow.

Valuation

• The analysts have a consensus price target of $76.833 for Greif based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $93.0, and the most bearish reporting a price target of just $65.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.0 billion, earnings will come to $325.7 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 7.7%.
• Given the current share price of $55.95, the analyst price target of $76.83 is 27.2% higher.
• 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.