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 (
. 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
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
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 "
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