We maintain our Underperform recommendation on
Sealed Air Corporation
) given lower-than-expected volumes at Diversey, wide exposure in
Europe, integration risks associated with the Diversey acquisition,
reduced guidance due to the difficult macro environment, foreign
exchange headwinds and lower volumes. The stock retains a
short-term Zacks #5 Rank (Strong Sell).
Sealed Air's second-quarter 2012 total revenue increased 65%
year over year to $2 billion while adjusted net earnings plunged
50% to 20 cents per share, due to weaker-than-expected margins. The
company lagged the Zacks Consensus Estimate on both
Sealed Air's Diversey acquisition is the second largest in the
company's history, just behind the $4.8 billion purchase of the
Cryovac food-packaging business in 1998 from W.R. Grace & Co.
Given the size of the deal, we are apprehensive regarding
integration risks. Further, to fund the acquisition and to repay
the existing debt of Diversey, Sealed Air had incurred debt. As of
June 30, 2012, Sealed Air's debt-to-capitalization ratio remained
high at 63.5% compared with 36% as of September 30, 2011, prior to
the acquisition. The rise in debt levels and the consequent
increase in interest burden are concerning.
In retrospect, Sealed Air's first half results were weaker than
expected due to low volumes at the recently acquired Diversey.
Volumes were down 2% in the first quarter and 3% in the second,
mainly due to weakness in Europe. Given that 52% of Diversey's
sales come from Europe and with no significant improvement in the
economic conditions, we believe results from Diversey will remain
In addition to Diversey, margins at the Food Packaging and
Protective Packaging segments margins were below expectations
affecting the second quarter results. At Diversey, margins were
affected by an unfavorable compensation comparison and investment
in Asia Pacific. In the Food Packaging segment, unfavorable product
mix, negotiated labor agreement and consolidation costs resulted in
the decline. In Protective Packaging, weakness in industrial
related applications led to lower margins.
The company has reduced its EPS guidance for 2012 to $1.00-$1.10
from $1.50-$1.60, due to the difficult macro environment, foreign
exchange headwinds and lower volumes. Gross margin is now expected
to be approximately 34%, down 1% from the prior guidance. Net sales
are expected to be approximately $7.7 billion, factoring in a
negative effect of approximately $400 million in foreign exchange
currency translation. Adjusted EBITDA is expected to be
approximately $1.05 billion to $1.075 billion, which includes a
negative impact of approximately $40 million due to unfavorable
Elmwood Park, New Jersey-based Sealed Air is a major specialty
packaging service provider to a diverse set of end markets. The
company operates in the United States and in 50 other countries
with packaging and performance-based materials and equipment
systems serving food, medical, and an array of industrial and
consumer applications. Sealed Air faces competition from companies
Sonoco Products Co.
BEMIS (BMS): Free Stock Analysis Report
SEALED AIR CORP (SEE): Free Stock Analysis
SONOCO PRODUCTS (SON): Free Stock Analysis
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