Berry Global Group, Inc. (NYSE:) seems to have lost its sheen, thanks to a highly leveraged balance sheet, high cost of sales and uncertainties related to international operations.
The manufacturer and distributor of non-woven specialty materials, engineered materials and consumer packaging products currently carries a Zacks Rank #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company belongs to the Zacks Containers – Paper and Packaging industry, which is at the bottom 34% (with the rank of 168) of more than 250 Zacks industries. We believe that the industry is suffering from adverse impacts of higher costs related to transportation, raw material, fuel and chemical.
It is worth noting that Berry Global reported weaker-than-expected results for third-quarter fiscal 2019 (ended Jun 29, 2019), wherein earnings missed the Zacks Consensus Estimate by 10%. The bottom line also declined 6.3% on a year-over-year basis. The company’s average earnings surprise for the last four quarters was negative 4.14%.
A glance at Berry Global’s price trend in the past three months shows that it has lost nearly 30.2% compared with the industry’s and the Zacks Industrial Products sector’s declines of 10.2% and 5%, respectively. The dipped 1.5% during the same period.
The company’s earnings estimates were lowered, reflecting bearish sentiments. Over the past 60 days, the Zacks Consensus Estimate for Berry Global’s earnings has declined 3.8% to $3.33 for fiscal 2019 (ended September 2019) and 6.8% to $4.08 for fiscal 2020 (ending September 2020).
Berry Global Group, Inc. Price and Consensus
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Berry Global Group, Inc. price-consensus-chart | Berry Global Group, Inc. Quote
Factors Hurting the Stock’s Performance
Top-Line Weakness: The company’s third-quarter fiscal 2019 results suffered from weakness in the Engineered Materials, and Health, Hygiene & Specialties segments. Notably, supply disruption and industrial market softness adversely impacted the Engineered Materials segment while weakness in the North America baby care market and customer product transitions in hygiene impacted the Health, Hygiene & Specialties segment.
We believe that persistence of these issues along with lower resin prices, soft demand and forex woes might adversely impact the above-mentioned segments.
Cost-Related Woes: Berry Global is exposed to headwinds arising from the undue rise in the cost of sales due to higher raw material, transportation and manufacturing costs.
In the last three fiscal years (2016-2018), the company’s cost of sales rose 7.4% (CAGR) while a hike of 0.3% has been recorded for the nine months ended June 2019.
Headwinds Related to International Operations: Berry Global has operations in South America, North America, Asia and Europe. We believe that geographical diversification exposed it to headwinds arising from geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies.
Notably, forex woes hurt the company’s sales by 0.8% in third-quarter fiscal 2019 while the similar impact of 1.1% was recorded in the second quarter.
Highly-Leveraged Balance Sheet: High debts can be concerning for Berry Global as it raises financial obligations and might adversely impact profitability.
The company’s long-term debt rose 0.5% (CAGR) in the last three fiscal years (2016-2018). Exiting third-quarter fiscal 2019, its long-term debt was approximately $5,468 million. Net interest expenses in the quarter were $71 million, higher than $67 million recorded in the year-ago quarter. Also, the company is more leveraged than the industry, with respective long-term debt-to-capital ratio of 77.9% and 57.6%.
It is worth mentioning here that the company is taking initiatives to repay debts. However, we believe that funding new investments and acquisitions will add to debt levels. For fiscal 2020, the company predicts interest expenses of approximately $500 million.
Berry Global’s Performance Versus Three Peers
The company underperformed its three industry peers — Graphic Packaging Holding Company (NYSE:) , AptarGroup, Inc (NYSE:) and Sealed Air Corporation (NYSE:) . In the past three months, shares of Graphic Packaging have gained 0.3% while that of AptarGroup and Sealed Air declined 7.1% and 8%, respectively.
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