Berry Global Group has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 9.9% to $66.66 per share while the index has gained 10.3%.

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We're cautious about Berry Global Group. Here are three reasons why BERY doesn't excite us and a stock we'd rather own.

Why Do We Think Berry Global Group Will Underperform?

Founded as Imperial Plastics, Berry Global (NYSE: BERY) is a manufacturer and marketer of plastic packaging products, including containers, bottles, and prescription packaging.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Berry Global Group grew its sales at a mediocre 6.7% compounded annual growth rate. This was below our standard for the industrials sector.

2. Core Business Falling Behind as Demand Declines

Investors interested in Industrial Packaging companies should track organic revenue in addition to reported revenue. This metric gives visibility into Berry Global Group’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Berry Global Group’s organic revenue averaged 7.4% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Berry Global Group might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

3. Recent EPS Growth Below Our Standards

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Berry Global Group’s EPS grew at a weak 1.5% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its 8% annualized revenue declines and tells us management adapted its cost structure in response to a challenging demand environment.

Final Judgment

Berry Global Group doesn’t pass our quality test. That said, the stock currently trades at 8.1× forward price-to-earnings (or $66.66 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at TransDigm, a dominant Aerospace business that has perfected its M&A strategy.

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