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Sealed Air: Expectations Priced In
Posted by: Mark Lin (IP Logged)
Date: November 20, 2012 09:20AM
Sealed Air (SEE) is a global leader in food safety and security, facility hygiene and product protection. With widely recognized and inventive brands such as Bubble Wrap brand cushioning, Cryovac brand food packaging solutions and Diversey brand cleaning and hygiene solutions, SEE offers efficient and sustainable solutions that create business value for customers, enhance the quality of life for consumers and provide a cleaner and healthier environment for future generations. On a pro forma basis, SEE generated revenue of $8.1 billion in 2011, and has approximately 26,300 employees who serve customers in 175 countries.
On Oct.3, 2011, SEE completed the acquisition of Diversey, a leading global provider of commercial cleaning, sanitation and hygiene products, services and solutions for food safety and service, food and beverage plant operations, floor care, housekeeping and room care, laundry and hand care, for a cash consideration of $2.1 billion and 31.7 million shares of Sealed Air common stock. SEE took a $1.2 billion goodwill impairment for Diversey in the third quarter of 2012.
SEE is trading at 1.91x P/B, a 27% premium over its five-year average P/B of 1.47x. In August 2012, SEE fell to a new 10-year historical valuation low of 1.04x P/B, before rebounding sharply to its pre-GFC historical valuation high of 1.9x P/B. SEE has achieved a five-year average ROE of 10.8% and a five-year book value per share CAGR of 8.4%.
Financial And Business Risks
SEE is highly geared with a gross debt-to-equity ratio of 290%. This is partly mitigated by an interest coverage ratio of 3.4 and current ratio of 1.2. SEE has targeted a net debt reduction of $331 million by the end of the year from proceeds of asset sale and from free cash flow.
SEE uses petrochemical-based raw materials to manufacture many of its products. The prices for these raw materials are cyclical, and increases in market demand or fluctuations in the global trade for petrochemical-based raw materials and energy could increase our costs. SEE also has some sole-source suppliers, and the lack of availability of supplies could have a material adverse effect on its operations.
SEE's Diversey segment is party to various agreements with S.C. Johnson & Son, Inc, or SCJ. Under the brand licensing agreement with SCJ, Diversey is granted a license in specified territories to sell certain SCJ products and use specified trade names and house marks owned by SCJ in the institutional and industrial channels of trade. Sales of these products have historically been significant to Diversey's business. In addition, in some countries, Diversey depends on SCJ to produce or sell some of its products.
Business Quality and Capital Allocation
In the food and beverage segment, SEE focuses on the automated packaging of perishable foods, predominantly fresh and processed meats and cheeses and advanced food packaging technologies that provide consumers convenient access to fresh, consistently prepared, high-quality meals. SEE is the only provider with end-to-end solutions designed for operational efficiency and lower waste and boosts of long-standing relationships and a large installed equipment base.
In the institutional and Laundry segment, SEE's Diversey has businesses in the five sectors: building service contractors, retailers, lodging, food service and healthcare. Diversey's services ensure higher productivity, adherence to protocols, lower waste (water, effluence, energy), and certification.
In the Protective Packaging segment, SEE engages in packaging solutions that provide efficiency and sustainability from factory floor to the customer’s door. 80% of SEE's revenues in this segment are derived from business supply distributors, with the remaining 20% sold to OEMs, e-commerce, fulfillment firms and retailers. SEE provides customer support in the areas of sales, service, design labs and owns strong channel partnerships.
SEE has paid out dividends in every single year since 2006 and its current dividend yield is 3.17%. Dividends are paid out quarterly.
Current valuations are unattractive at 1.9x P.B, after the sharp share price run-up since August 2012. Insiders are cashing out. Jean-Marie Demeautis, the vice president of SEE has sold 46,000 shares (74,386 share options awarded in February 2012) at an average price of $16.60 on Nov. 15, 2012.
The author does not have a position in any of the stocks mentioned.
Stocks Discussed: SEE,