Greif, Inc. Keeps Packing Great Returns

I hadn’t heard of this company until last year. If you don’t already know about it, you should. Greif, Inc. (GEF) has been in operation for 130 years, and has managed to get a lot of things right in that time, especially of late. While much of the market is struggling, GEF shares are near their 52-week high. Over the past year, GEF's share price has increased 24%. And since January, the stock is up 4%. Of course, the Dow and S&P 500 are in negative territory since January. Below a chart of GEF over the last three years, vs. the S&P:

click to enlarge

GEF has three main businesses: industrial packaging, paper packaging, and timber. The company has a market cap of $3.3 billion. It is a global leader in the packaging industry and has four main product lines:

1) Plastic drums (typically for chemicals, hazardous materials),

2) Steel containers (for chemicals, paint, pharmaceuticals, etc.),

3) Fibre drums (heavy cardboard containers for food, e.g., tomato paste), and

4) Packaging systems (water bottles, water coolers, custom designed boxes, and multi-wall packaging, e.g. for specialty coffees)

Growth through Acquisition:

Since 2001, the company has grown 46% to total assets of $2.6 billion. Much of this growth has been through acquisitions. In 2006-2007, Greif acquired US-based Delta Petroleum Company, which blends and packages lubricants, chemicals, and glycol-based products, and Blagden Packaging’s steel drum business in Europe and Asia.

Global Operations:

Greif has operations in 45 countries worldwide, from Algeria to Turkey, and recently opened new plants in Russia and China. This diversifies the company geographically and reduces its shipping costs.

Financials:

In my opinion, Greif has solid financials. GEF’s fiscal year is November 1 to October 31. In 2007, free cash flow was $273.3 million, an increase of 200% over the prior year. Greif pays a dividend of 1.6%, which is 19% of its free cash flow and 13% of its net income. Long term debt is 23% total assets and is steady; the current ratio is 1.3. Last year, net income was up 9.9%, while revenues increased 26%. The company’s annual report states that income from Europe and emerging markets has offset slowing income in North America. Here is a comparison of GEF and its competitors.

As you can see above, GEF is less leveraged than either competitor, and while Ball Corp. has global operations, Temple Inland is primarily in the US and Mexico.

What Are the Risks?

For the packaging business, raw materials price increases and increased global competition are the primary risks. Of late, steel has gone up dramatically. However, GEF has written many of its contracts so that raw material cost increases can be passed on to the customer.

What About Valuation?

In a recent presentation management said that: “historically...as you know, we have always tried to under promise and over-perform and I think it is justified in this market because we really don't know where the economy is heading and with rising raw material costs.” GEF has done exactly that by turning in positive earnings surprises in six of the last eight quarters.

To see whether I think the current share price of $70 is justified, I did a discounted cash flow, using the 2008 analyst consensus EPS of $4.13. While most analysts estimate 20% growth between 2008 and 2009, I used a lower figure. Assuming 15% growth over the next three years, a 3% reversion growth rate and a 10% discount rate, I get a valuation of $71 per share, rounded. Using the same assumptions, but with 12% growth the next three years, I get a valuation of $66 per share. As I think this company has strong long-term prospects, I plan on adding shares in the future.

Disclosure: The author does not have a position in GEF.

Comments

[Paul Price]

Since your projected fair values are already-at or BELOW the current share price - why would you be interested in buying?

Maybe you should be selling to purchase something undervalued.

[DanielJacome]

like the stock and it's sort of under the radar: what do you see as the catalyst in the next 3-6 months? I know GED foes container board for ag goods, surprised you didn't mention it, cause the whole farm/ag food chain is cooking.....