Sealed Air's Businesses Remain Attractive

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Oct 21, 2014

In this article let's take a look at Sealed Air Corporation (SEE, Financial), a leading global manufacturer of a wide range of food and protective packaging materials and systems.

Diversifying regions and businesses

The company has a portfolio of widely recognized brands – including Cryovac (R) brand food packaging solutions, Bubble Wrap (R) brand cushioning and Diversey (TM) cleaning and hygiene solutions – that ensures a safer and less wasteful food supply chain, protects valuable goods shipped around the world and improves health through clean environments

About 80% of the Food Care segment is represented by Sealed Air's legacy food-packaging products, and the remaining 20% comes from Diversey's food and beverage cleaning and sanitizing solutions. Due to increases on disposal incomes in emerging markets, demand for protein-rich foods such as beef, pork and poultry have increased, and the company benefited from this. It is expected that this trend will continue and should offset any downturn in developed markets.

In February 2014, due to the escalation of its raw materials and other costs, in particular polyethylene, nylon and benzene, the company announced price increases in the range of 3% to 8% within the company’s Food Care and Product Care divisions in North America. “As our raw materials costs continue to rise in 2014, we will remain steadfast to a pricing strategy to recover these costs. In 2014 alone, suppliers of polyethylene (PE), nylon and benzene, large inputs to our products, have announced significant price increases on top of significant increases in 2013. Most recently in North America, PE suppliers announced price increases of $0.04 effective February 1, 2014, with further announced increases March 1, 2014. To date these increases range between 21% and 28% since January 1, 2013. Benzene prices have increased 25% over the past three months and nylon is increasing $0.10 or 6%,” said Jerome A. Peribere, president and CEO, Sealed Air.

On the other hand, another important segment is the Diversey Care, which sells chemicals, dosing and dispensing systems and floor-care systems to cleaning-service companies. The firm is the second-largest leader in the global cleaning-supply industry with less a bit less than 10% share of the global market.

Restructuring program

Last year, the firm announced another restructuring program, 2013 Earnings Quality Improvement Program, to deliver meaningful cost savings and network optimization. Under this program the firm projects $80 million to $110 million of annual savings between 2013 and 2015, at a cost of $130 million to $150 million. It plans to focus on cost-cutting strategies, too.

Revenues, margins and profitability

Looking at profitability, revenues grew by 1.86% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.28 vs $0.25). During the past fiscal year, the company earned $0.41 versus -$8.39 in the previous year. This year, Wall Street expects an improvement in earnings ($1.68 versus $0.41).

In the next table we can appreciate the quarterly earnings surprise history:

Fiscal Quarter End EPS Consensus EPS Forecast % Surprise
Jun. 14 0.28 0.39 7.7
Mar. 14 0.33 0.24 37.5
Dec. 13 0.34 0.37 -8.11
Sept.13 0.39 0.34 14.71
June 13 0.35 0.25 40

Source: Yahoo Finance

The gross profit margin is considered high at 36.61% and the net profit margin of 3.05% is similar to that of the industry average.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
SEE Sealed Air 13.95
BMS Bemis Co Inc. 13.51
SON Sonoco Products Co 14.04
Ă‚ Industry Median 8.72

The company has a current ROE of 13.95% which is higher than the industry median and Bemis Co (BMS, Financial), but lower than Sonoco Products (SON, Financial).

In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, this company satisfies those levels. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

03May20171324481493835888.png

Relative valuation and price performance

In terms of valuation, the company sells at a trailing P/E of 35.4x, trading at a premium compared to the industry mean.

Ticker Company P/E
SEE Sealed Air 35.4
BMS Bemis Co. Inc 17.6
SON Sonoco Products Co. 18.0

This ratio indicates that the stock is relatively overvalued when compared to its peers.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,154, which represents a 12.7% compound annual growth rate (CAGR).

In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance in the last year showed an interesting upward trend.

03May20171324481493835888.png

Final comment

As outlined in this article, the restructuring program that the company is engaged are driving financial and operational excellence and improving the quality of our business. We continue thinking that value initiatives as well as pricing disciplines will help to boost the company´s revenues in the future.

I would recommend investors consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the second quarter of 2014. Joel Greenblatt (Trades, Portfolio), Robert Olstein (Trades, Portfolio) and Jean-Marie Eveillard (Trades, Portfolio) have taken long positions on it, as well as RS Investment Management (Trades, Portfolio), while Caxton Associates (Trades, Portfolio) bought it in that time frame.

Disclosure: Omar Venerio holds no position in any stocks mentioned.