On Wednesday, Truist Securities adjusted its position on Berry Global Group (NYSE:BERY), downgrading the stock from Buy to Hold and reducing the price target to $68 from $75.
The shift in rating comes as the analyst predicts the stock will become range-bound following its recent deal announcement with Glatfelter, a non-rated company. Concerns were also raised regarding Berry Global's leverage, which is anticipated to stay high after the deal, and the continuation of volume weakness.
Berry Global recently disclosed, alongside its first quarter 2024 earnings, the spin-off and merger of its Health, Hygiene, & Specialties (HHS) business with Glatfelter. The completion of this transaction is expected in the second half of 2024. The new combined entity will be predominantly owned by Berry Global shareholders, holding approximately 90% of the ownership, while Glatfelter shareholders will own around 10%.
The valuation of the merged business is estimated to be around $3.6 billion, which is approximately 8 times its EBITDA. The deal also entails a significant cash distribution of about $1 billion to Berry Global. This distribution will be financed through additional leverage taken on by the new entity.
The analyst's decision to downgrade Berry Global Group reflects concerns over the company's financial strategy post-merger, especially in terms of the debt level that will be maintained. The ongoing challenges in volume are also expected to impact the stock's performance, leading to the analyst's conclusion that the stock's potential for growth may be limited in the near term.
InvestingPro Insights
As Berry Global Group (NYSE:BERY) navigates its recent downgrade by Truist Securities, real-time data from InvestingPro provides additional context for potential investors. With a market capitalization of $6.87 billion and a P/E ratio that has adjusted to a more attractive 10.53 over the last twelve months as of Q1 2024, Berry Global presents a noteworthy case for valuation-focused investors. Despite recent revenue contraction, the company maintains a robust gross profit margin of 18.19%.
InvestingPro Tips highlight that management's active share buyback strategy and a strong free cash flow yield are factors that might appeal to shareholders looking for signs of confidence and potential returns. Moreover, the fact that analysts are predicting profitability this year, coupled with the company's profitability over the past twelve months, suggests underlying strength in Berry Global's financials. With an additional 4 InvestingPro Tips available, investors can gain deeper insights by using the coupon code PRONEWS24 to get an extra 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
While the downgrade reflects concerns over Berry Global's leverage and volume weakness, the InvestingPro Fair Value estimate of $65.91, modestly below the analyst target of $75, indicates that there may still be upside potential. Investors will also note the dividend yield of 1.86%, with a recent growth of 10%, which could be attractive for those seeking income along with equity investment.
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