Why is Berry Global (BERY) up 12.9% since its last earnings report?

It’s been a month since Berry Global’s (BERY) last reported earnings. Shares are up about 12.9% in that time, outperforming the S&P 500.

Will the recent positive trend continue into its next earnings release, or is Berry Global headed for a pullback? Before we dive into how investors and analysts have reacted recently, let’s take a quick look at the latest earnings report to better understand the important factors.

Berry Global’s second-quarter earnings beat estimates, revenue falls short

Berry Global reported mixed results for the second quarter of fiscal 2020 (ended March 28, 2020), with earnings surpassing the Zacks Consensus Estimate but revenue flat.

The company’s fiscal second-quarter adjusted earnings of $1.19 per share were higher than the 84 cents reported a year earlier. However, net income beat the Zacks Consensus Estimate of $1.07 by 11.2%.

Berry Global net sales were $2,975 million, up 52.6% year over year. The improvement was driven by gains from acquired assets and a 2% increase in organic volumes, partially offset by a decline in selling prices. However, the top line was 2.9% below the consensus estimate of $3,064 million.

Segment performance

The company reports results in four segments — Consumer Packaging–International, Consumer Packaging–North America, Health, Hygiene & Specialties and Engineered Materials. A brief overview of segment sales for the fiscal second quarter is below:

Consumer Packaging–International sales were $1,095 million compared to $50 million in the same quarter last year. The increase was driven by a significant contribution from net sales from the RPC acquisition, which represented 36.8% of net sales for the quarter.

Consumer Packaging–North America sales were $706 million, up 10.5% year over year. The increase was driven by gains from acquired assets, partially offset by lower selling prices. This represented 23.7% of quarterly net sales.

Health, Hygiene & Specialties revenues were $576 million, down 10.3% year over year. The decline was primarily due to the sale of the SFL business and lower selling prices. This represented 19.4% of quarterly net sales.

Engineered Materials revenue declined 3.4% year over year to $598 million. The decline was driven by lower selling prices, partially offset by a 2% increase in underlying volume. This represented 20.1% of quarterly net sales.

Margin Details

In the fiscal second quarter, Berry Global’s cost of goods sold increased 51.5% to $2,391 million, representing 80.4% of net sales, compared with 80.9% in the year-ago quarter. Selling, general and administrative expenses increased 42.7% to $204 million, representing 6.9% of net sales.

Adjusted operating income for the quarter increased 45% to $332 million. Adjusted operating margin was 11.1%, down 60 basis points year over year. Interest expense was $111 million, up 68.2% year over year.

Balance sheet and cash flow

Berry Global ended the second quarter of fiscal 2020 with cash and cash equivalents of $953 million, down from $750 million a year earlier. Current and long-term debt decreased 2.2% to $11,115 million from December 28, 2019.

In the first half of fiscal 2020, the company generated $533 million in net cash from operating activities, an increase of 61% compared to the same period last year.

During the quarter, invested capital for the acquisition of property, plant and equipment totaled $115 million, compared to $92 million. Free cash flow for the reported quarter was $200 million, compared to $78 million reported in the same quarter a year earlier.

Perspectives

For fiscal 2020 (ending September 2020), Berry Global is forecasting free cash flow of more than $800 million, with cash flow from operations of at least $1,400 million and capital expenditures of $600 million. In addition, interest expense for fiscal 2020 is expected to be $430 million, and taxes are estimated at $150 million. In addition, working capital, restructuring and other costs are expected to be $50 million.

How have estimates changed since then?

It turns out that estimate revisions have been on a downward trend over the past month.

VGM Results

Berry Global currently has a great Growth Score of A, although its Momentum Score is slightly weaker at B. Similarly, the company has an A rating on the Value side, putting it in the top 20% of companies using this investment strategy.

Overall, the stock has a composite VGM Score of A. If you’re not focused on a single strategy, this rating should interest you.

Perspectives

The stock is trending lower, and the magnitude of these revisions indicates a downward shift. Interestingly, Berry Global has a Zacks Rank #3 (Hold). We expect the stock to deliver consistent returns over the next few months.

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