After a 70% Spike, This Stock Still Has Plenty of Upside

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Even the brightest minds of the business world can make mistakes. The key is tospot those mistakes in a timely fashion and take corrective action.

That was on Jerome Peribere's mind in August 2012, when he was hired asCEO of packaging giant Sealed Air ( SEE ) . He knew his predecessor, William Hickey, had really messed up, making a $4.3 billionacquisition that failed tocapitalize on the company's core strengths.

By the time Peribere took the reins, shareholders had abandoned thisstock , as I noted here.Shares had plunged to about $14, and I figured that Peribere simply needed to whip the newly acquired Diversey into shape, helping it to deliver the operating metrics to which the core Sealed Air divisions had grown accustomed.

Peribere's efforts on that front are starting tobear fruit, and this stock has already zoomed back into the $20s, as I suspected it would last August.

Back then, I echoed investor concerns that Sealed Air's packaging products weren't necessarily a great fit with Diversey's cleaning products and services. "If you are wondering what that business has in common with packaging, you're not alone. Investors could see little logic to the deal -- and many still don't," I wrote at the time.

I still don't see the fit, though Peribere partially mitigated the problem by selling Diversey's Japanese division in October 2012 for $377 million. He is now tasked with bringing the rest of Diversey up to snuff, and if he succeeds, then the whole acquisition may eventually be divested.

Credit Suisse's John McNulty recently met with management and noted that plans are afoot to "stabilize and possibly improve the 'Diversey' business," adding that the steps should "translate into improvedearnings growth and increasedcash flow " from an already robust level. After those meetings, McNulty boosted hisprice target from $18 to $31-- which represents an additional 30%upside from current levels.

To be sure, it may require patience for theseissues to reach fruition. Peribere aims to boost pricing across the company's myriad divisions -- over the course of time. He wants Sealed Air to lock in existing and new customers with far-reaching contracts, and then aims to push for price increases once those customers have proven to be quite successful.

So Sealed Air's pricing increases are really likely to take root in 2014 and 2015. As it stands, consensusanalysts ' forecastscall for earnings-per-share (EPS ) to rise 25% this year to about $1.20 onrevenue growth of just 2%. The company's myriad streamlining efforts explain the sales andprofit growth differential for this year.

Higher prices should help the top-line expand at closer to a 5% pace in 2014 and 2015, so analysts expect EPS to approach $1.55 in 2014 and perhaps $1.75 by 2015. Credit Suisse's McNulty is even morebullish , projecting EPS of nearly $2 in 2014 and $2.33 by 2015.

Merrill Lynch's George Staphos, who rates shares as a "buy," is bullish for slightly different reasons. He says management is committed to continueinvesting in various areas of operational improvement, and expects the higher capital spending to keepfree cash flow under $400 million in 2013 and 2014. Yet when the spending winds down by 2015, Staphos figures free cash flow could reach $800 million. The company is valued at around six times that figure, translating into an eye-popping 16% free cash flowyield in the context of projected 2015 results.

Few companies in the S&P 500 besides Sealed Air are set up to deliver such a robust free cash flow yield. That could set the stage for soliddividend hikes (the current dividend yields about 2%) and perhaps robust share buybacks.

Risks to Consider: Sealed Air operates in a range of economically sensitive industries, and demand for its packaging products would fall if global trade were hampered by a fresh international slowdown.

Action to Take --> Part of Sealed Air's solid free cash flow will be earmarked for debt pay downs:Long-term debt currently stands at about $4.6 billion, in part due to that pricey acquisition. Yet as thedebt load lightens, Sealed Air will be in a better position to deliver impressive shareholders returns, making this company a solid entry into the class of companies that are in the " Dividend Vault. "



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: SEE

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