Jerome Peribere had a short honeymoon with investors -- one day
to be exact. When news broke on Wednesday, Aug. 29, that he would
become president of
Sealed Air (NYSE:
, investors cheered him with a quick 12% gain in the company's
stock. A day later, the stock was already pulling back.
Peribere brings serious chops to this struggling packaging
giant: He oversaw a $12 billion division of
Dow Chemical (NYSE:
. And you can bet he has some strong ideas about how to fix the
mess his predecessor at Sealed Air created.
Former President William Hickey (who will stay on a few more
quarters asCEO and chairman before retiring) oversaw a
botchedacquisition that has leftshares in the doghouse.
The solid gain for this stock likely had more to do with his
departure than Peribere's arrival. Though in a moment, I'll explain
why Peribere's arrival is a lot more significant than it may seem,
and there may be a chance for investors toprofit .
Fixing what's not broken
Hickey had been running a fairly sleepy and unsexy business with
roots dating back to 1960. The company is a global leader in food
packaging, with brands that include Bubble Wrap, Cryovac, Instapak
and others. You can find these products in almost any business'
shipping department, and increasingly, in the butcher's section of
Business hummed along every year, with sales growing 4-8% each
year from 2004 to 2008. Even after an economy-related setback in
2009, sales rebounded 6% in 2010 to $4.49 billion. But that was
still below the peak sales of $4.84 billion reached in 2008, which
likely made Hickey anxious to find new paths to growth.
In June 2011, Sealed Air moved to acquire Diversey for $4.3
billion in cash and stock. Diversey was the second-leading provider
) of cleaning and sanitation services and equipment. 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
When the deal was announced, Hickey promised to deliver a wide
range of cost cuts. He also intended to find ways to cross-sell
Sealed Air's products to Diversey's customers, and vice-versa.
Those goals have been slow to materialize, adding insult to an
already unappealing acquisition.
Peribere's Task Ahead
The good news: Sealed Air isn't broken, just in need of some deep
tinkering. In many respects, Peribere looks like the man for the
job. In his role at Dow Chemical, Peribere was partially
responsible for the company's cleaning and solvents business, which
makes it a direct competitor of Diversey. In short order, look for
Peribere to institute ways Diversey can mimic the best practices
deployed by Dow Chemical.
Peribere also has a history of focusing on developing new
products that customers will pay a premium for. So look for
discussions on the ways in which Sealed Air can step up its product
But even before his arrival, Sealed Air was already taking steps
to boost profits. It has outlined $90 million in 2012 cost cuts and
another $95 million in 2013. That should set the stage for a return
to more than $300 million in annualfree cash flow (which is where
it stood in 2009 and 2010 before falling to $180 million in 2011).
To make things better, Merrill Lynch's Staphos foresees free cash
flow exceeding $500 million by 2014.
You always want to see management's interests aligned with
shareholders. It's notable that much of the new CEO's compensation
is tied to the stock price. The higher it rises, the more he'll hit
his milestones. He won't simply benefit from a rising stockmarket .
Sealed Air's stock must outperform a group of rivals selected by
its board, which is a mix of chemical companies (
among others) and packaging companies, (including
Avery Dennison (NYSE:
Ball Corp. (NYSE:
). The ability to score a big payday might explain why Peribere is
giving up a 35-year long career at Dow Chemical for this more
Risks to Consider:
This is an economically sensitive business, and more than half
of sales are derived abroad. Even as management works to streamline
operations, sales gains may be muted in the near-term.
Also, PerIbere will need to figure out how to boost
Diversey's margins, or construct a plan to unload the business,
as it's dragging down company-wide margins.
Action to Take -->
Peribere knows he's getting in while shares are trading cheap. The
stock's steady drop means it trades for less than eight times
projected 2013 profits. Shares also trade for less than five times
projected 2013EBITDA . In effect, this is shaping into a low-risk,
high-rewardturnaround play. If Peribere does nothing more than cut
costs, then shares are likely to hover at current depressed levels.
But if he can reinvigorate growth and boost margins, then analysts
will soon be speaking of expanded price-to-earnings (P/E )multiples
, and this stock could move back into the $20s, where it was in the
spring of 2011, which is about 40% above current levels.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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