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Does Rhizome Partners Still Believe in BERY?

Insider Monkey has recently published a copy of Rhizome Partners’ Q2 2019 Commentary. In the said letter, Rhizome Partners highlighted a few stocks and Berry Global Group, Inc. (BERY) is one of them.

Berry Global, a company that provides plastic packaging and protective solutions, enjoys structural scale advantages over its smaller competitors through raw material purchasing discounts. According to Rhizome’s most recent report, Berry experienced a decline in organic earnings before interest, tax, depreciation, and amortization (EBITDA) in the following divisions: (1) Engineered Materials and (2) Health, Hygiene, and Specialty.

plastic

The reduction of product weight caused the Engineered Material’s 12% EBITDA decline as well as problems inside the business. Rhizome believes that product quality issues and customer returns might have caused the said decline. On the other hand, Berry’s Health, Hygiene, and Specialty division suffers from low diaper volumes because of North America’s low birth rates. The company transitioned its investments to adult incontinence care and feminine products, but the process will surely take a lot of time. Despite these declines, Rhizome reckons that Berry trades at a 13% free cash flow return at the end of the quarter.

Berry Global – The Company makes plastic packaging such as plastic containers, films, tapes, bags, and liners under their Consumer Packaging, Health, Hygiene, & Specialties and Engineered Materials divisions.  Berry enjoys structural scale advantages over its smaller peers through discounts in raw materials purchasing.

Q2 2019 Updates – Since the beginning of the year, Berry has experienced organic EBITDA declines in its Engineered Materials and Health, Hygiene, & Specialties divisions.  Per management’s commentary, the decline in Engineered Materials’ EBITDA is due to attempts to reduce the weight of their products.  This resulted in disruption inside the business.  We chatted with a customer of Berry during a packaging conference at the Javits Center in New York City.  He confirmed that there have been quality issues with Berry’s stretch films and he has returned products to Berry on couple of occasions.  We believe this is the reason that there is a 12% decline in EBITDA within the division despite the small drops in volume.  However, the customer also mentioned that he continues to buy from Berry because Berry has worked diligently with him to resolve these quality issues.  The impacts from this issue will likely take a couple of quarters to be resolved.  Public equity holders are notorious for their fickle responses.  This is especially so when a company is levered at 5 times EBITDA.  For most shareholders, 2‐4 quarters might as well be an eternity. On the Health, Hygiene, and Specialty side, Berry suffers from low volumes of diapers due to low birth rates in North America.  Berry has invested in adult incontinence care and feminine products which are growth categories.  However, transitions take time and Wall Street has little patience.  In the meantime, Berry continues to generate a prodigious amount of free cash flow.  While Berry is a zero to low growth business, its free cash flow generation is almost “bond like.”  After the RPC acquisition, Berry’s valuation and capital structure now resembles that of private equity deals during the “golden age.”  We estimate that Berry trades at a 13% free cash flow yield at quarter end.  We believe this is extremely cheap despite a five times debt‐to‐ EBITDA ratio.”

The stock was trading at $59.26 a couple of years ago, but it is currently at $38.44. It returned -35.13% over the last 2 years, which compares to the S&P 500 ETF (SPY)’s 15.77%. The stock’s underperformance proves that Rhizome would have enjoyed better gains if they chose to invest in an index fund. However, Rhizome still believes in BERY because of the free cash flow it generates. Do you think BERY will recover in the near future? Please tell us in the comment section below.

Disclosure: None. This article was originally published at Insider Monkey.

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