Will Greif (GEF) Disappoint Earnings Estimates in Q2?

Greif, Inc. GEF will release its second-quarter fiscal 2015 financial results before the market opens on Jun 9, 2015. In the prior quarter, the company reported a negative earnings surprise of 18.9%. Let's see how things are shaping up for this announcement. The global leader in industrial packaging products and services has been unsuccessful in beating the Zacks Consensus Estimate in the past four quarters, leading to an average negative surprise of 22.36%.

Factors to Consider

The company expects adjusted earnings for the second quarter to be in line with its expectations. However, foreign currency volatility remains a challenge for the company as strengthening of the U.S. dollar against other currencies will continue to impact both Greif's top and bottom lines.

Even though Greif's strategic transformation plans will benefit the company in the future, they will result in significant impairment and restructuring charges in the second quarter as well as through the rest of fiscal 2015. Moreover, falling oil prices have a direct impact on demand for industrial packaging in the energy sector. A number of energy producers had cut exploration and production activities in response to sharply lower oil prices, especially the smaller companies engaged in tracking in North America.

Lower oil prices have also started to impact the cost of Greif's raw materials, as evident from declining polyethylene and polypropylene prices. Rapid drop in energy and raw material cost has disrupted the overall supply chain and motivated some customers throughout the value chain to destock their inventories and delay ordering to benefit from anticipated lower cost.

Geographically, the company continues to face headwinds in Latin America and Europe. In Latin America, regional political and economic issues are affecting volumes. In the EMEA region, while Middle East, Africa and Eastern Europe are performing well, there is considerable volatility in Russia, particularly related to currency and supply chain issues. Western Europe continues to be challenged by competitive pressures particularly in the markets of Germany and Scandinavia.

The Flexible Products & Services segment continues to underperform. Management stated that the company is unlikely to achieve its previous goal of boosting EBITDA margins to 12% by the fourth quarter on a run-rate basis for Flexible Products & Services given the deteriorating labor market for the segment. However, the SG&A target of 10% appear achievable.

Earnings Whispers?

Our proven model does not conclusively show that Greif will beat earnings this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Zacks ESP: Greif currently has an Earnings ESP of -18% because the Most Accurate estimate stands at 41 cents, while the Zacks Consensus Estimate is pegged higher at 50 cents.

Zacks Rank: Greif's Zacks Rank #4 (Sell) when combined with a negative Earnings ESP makes surprise prediction unlikely. We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some firms in the same sector worth considering as our model shows they have the right combination of elements to post an earnings beat this quarter.

Avery Dennison Corporation AVY has an earnings ESP of +1.15% and carries a Zacks Rank #3.

MeadWestvaco Corporation MWV has an earnings ESP of +1.96% and carries a Zacks Rank #3.

Owens-Illinois, Inc. OI has an earnings ESP of +1.67% and carries a Zacks Rank #3.

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MEADWESTVACO CP MWV: Free Stock Analysis Report
 
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GREIF INC GEF: Free Stock Analysis Report
 
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