Spruce Point Capital has some legitimate gripes about Greif, but they don’t bring anything new to the table and the market has shrugged off the short thesis
Spruce Point Capital released its latest short campaign today, this time against the $2 billion manufacturer Greif, but after brief knee-jerk sell-off Greif’s stock price has basically recovered (down 0.5% for the day) because the weaknesses that Spruce Point highlights were mostly known to people following the company. The most important is that Greif’s dividend coverage ratio isn’t that high and there have been some concerns that its dividend could come under pressure.
Greif has issues, but they aren’t new
Greif’s stock price has already been falling, class A shares are down from $55 last spring to $38.80 today and class B shares have fallen from $60 to $44.50. The first hit came last summer when its auditor Ernst & Young called it quits, which didn’t trigger a crash but was the beginning of a four-month slide. After rallying in December, Greif notified the SEC that it wouldn’t be able to file its 10-K on time and the slide continued. Greif’s new auditor, Deloitte, reported that there are material weaknesses in the company’s internal controls for financial reporting, which may explain why its stock price hasn’t recovered even though it has finally gotten its filings in order.
That’s problematic, clearly, but it’s also reflected in current stock prices.
Greif has also been spending a lot on acquisitions and restructuring, which Spruce Point argues should be considered a recurring cost since the company has incurred it every year for more than a decade, and free cash flow reporting has been idiosyncratic, but again Greif has been called out on their cash flow reporting by analysts. Spruce Point Capital quotes analyst misgiving to back up its short thesis, but this just shows that while the stock is far from perfect, anyone who’s invested really should know that by now.
Like most companies that go through a period of heavy acquisitions, Greif has racked up long-term debt, goodwill, and intangibles, but these have actually fallen in recent years – even according to the charts that Spruce Point put in its presentation.
Greif insiders don’t seem confident in the company
One thing that Spruce Point hits on that really should give investors pause is that insiders don’t seem to have much faith in the company themselves. Insider ownership of class B shares (which have voting rights, higher dividends, and a higher stock price), has collapsed in recent years and ownership of class A share is down as well. Current management isn’t getting paid in stock options, which Spruce Point interprets to mean that they don’t have much faith in the company themselves.
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