Sealed Air Rides on Product Innovation, Near-Term Risks Stay

On Aug 21, 2017, we issued an updated research report on Sealed Air CorporationSEE . The specialty packaging service provider will benefit from focus on product innovation, acquisitions and growth in eCommerce. However, higher raw material costs and lower volumes in Latin America due to ban on Brazil beef exports remain primary headwinds.

Sealed Air reported second-quarter 2017 adjusted earnings per share of 35 cents, down 5.4% year over year. Earnings also missed the Zacks Consensus Estimate of 36 cents. Total revenues increased 3% year over year on a reported basis to $1.07 billion in the quarter. Revenues beat the Zacks Consensus Estimate of $1.064 billion.

For 2017, Sealed Air guides net sales of $4.3 billion, as compared with $4.2 billion for 2016 based on an expected 3% constant dollar sales growth in Food Care and 3-4% constant dollar sales growth in Product Care. Adjusted EBITDA from continuing operations for the full year 2017 is now anticipated to be in the range of $825-$835 million, as compared with $808 million for the full year 2016. Volume growth, partially negated by higher raw material costs, a higher mix of e-Commerce and fulfillment sales will drive growth in EBITDA. Adjusted EPS from continuing operations is expected to be in the range of $1.75-$1.80 for the full year 2017.

Sealed Air's top-line will be supported by enhanced demand for its core product portfolio, recently-introduced innovations, and accelerated growth in the global protein market along with the eCommerce sector. Sales for its new products, including B+, FloWrap, StealthWrap, inflatable bubbles and automated mailers, are anticipated to ramp up in 2017 and contribute to both the top and bottom-line growth. The company is winning new customers worldwide given its innovative platforms including the Internet of Things, Intellibot robotics, clean-in-place solutions, biodegradable chemistry, dry lube and others.

Through the Sealed Air Restructuring Program, the company expects to generate incremental cost savings of $100-$110 million per annum by the end of 2019, compared with the savings run rate achieved by the end of 2015. Of this, approximately $25 million is anticipated to be achieved in 2017.

The company is divesting its Diversey Care division as well as the food hygiene and cleaning business within the Food Care division for gross proceeds of $3.2 billion. The transaction is on track to close in September 2017 and would create two independent companies. This is a step in the company's transformation and will enable it to enhance strategic focus on the Food Care and Product Care divisions along with simplifying operating structure. The transaction is expected to generate approximately $2.5 billion in net cash, on after-tax basis. The cash proceeds from this transaction will be utilized to repay debt and maintain credit profile, repurchase shares, and also fund core growth initiatives. This includes potential complementary acquisitions to Food Care and Product Care divisions.

On the flipside, the pending sale of Diversey will be substantially dilutive to earnings. Further, costs associated with the Diversey Care operations and various restructuring actions underway will strain margins.

Further, Sealed Air's results in APAC will be impacted as the Australia/New Zealand region rebuilds cattle herds, which is normally a two to four-year process and dairy markets remain muted. The selective ban on the Brazilian beef export will stall the recovery in this local market and negatively impact volumes in Latin America in the third quarter of 2017. Higher raw material prices will also impact margins.

In the past one year, Sealed Air has underperformed the industry it belongs to. The stock dipped 5.9% while the industry gained 8.3%.

Sealed Air carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same sector include Terex Corporation TEX , AGCO Corporation AGCO and Owens-Illinois Inc. OI . All the three stocks flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Terex has an expected long-term growth of 19.67%.

AGCO has expected long-term growth of 13.51%.

Owens-Illinois has an expected long-term growth of 9.65%.

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

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

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