It has been about a month since the last earnings report for Sealed Air CorporationSEE . Shares have lost about 4.1% in that time frame, underperforming the market.
Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Sealed Air Tops Earnings, Lags Revenues in Q4
Sealed Air's fourth-quarter 2016 adjusted earnings per share of $0.76 beat the Zacks Consensus Estimate by a penny but remained flat year over year. Including special items, earnings came in at $0.87 per share, up 40% from the year-ago quarter.
Total revenue dipped 0.6% on a reported basis to $1.744 billion in the quarter. Revenues missed the Zacks Consensus Estimate of $1.78 million. The Food Care divestitures had a negative impact on total sales of 0.3% while currency had a negative impact of 2.3%.
Net sales on an organic basis rose 2%. This was aided by an increase in North American sales volumes across all segments. In addition, favorable price/mix contributed to organic sales growth, reflecting positive trends in Diversey Care and Food Care, which helped counter declines in Product Care.
Cost and Margins
Cost of sales slipped 1% year over year to $1,103 million. Gross profit inched up 1% to $641 million. Gross margin expanded 40 basis points (bps) to 36.7% in the quarter.
SG&A expenses fell 1% to $405 million from the prior-year period. Adjusted operating profit increased 4% to $236 million. Adjusted operating margin expanded 50 bps to 13.5%.
Adjusted earnings before interest, taxes and depreciation, and amortization (EBITDA) were $304 million, compared with $282 million in the year-ago quarter. Favorable price/cost spread and restructuring savings along with higher sales volume were partially neutralized by higher operating expenses, unfavorable currency translation and impact of divestitures.
Food Care: Net sales edged down 0.2% year over year to $841 million. However, adjusted EBITDA improved 13% to $178 million.
Diversey Care: In this segment, net sales were $492 million, down 0.4% on a reported basis. Adjusted EBITDA increased 16% to $64 million from $55 million in the year-ago quarter.
Product Care: The segment reported net sales of $394 million, down 1.7% year over year on a reported basis. Adjusted EBITDA increased 1.7% to $87.7 million.
Financial & Other Updates
Cash and cash equivalents were $363.7 million as of Dec 31, 2016, up from $352 million as of Dec 31, 2015. Cash flow from operating activities in 2016 was $907 million, down from $982 million in the prior year. In Mar 2015, Sealed Air had received a tax refund of $235 million related to the payment of funds in connection with the settlement agreement. Excluding the refund, cash flow from operating activities in the 2015 were pegged at $747 million.
As of Dec 31, 2016, Sealed Air's net debt was at $3.995 billion compared with $4.210 billion as of Dec 31, 2015. The decline was driven by working capital management and cash generated from operating activities, partially offset by higher capital expenditures and amounts paid for share repurchases and dividends.
During 2016, Sealed Air repurchased approximately 4.7 million shares of its common stock for approximately $217 million and paid dividends worth $122 million. The company's decision to pursue the separation of New Diversey through either a tax-free spin-off or other strategic alternatives restricts the ability to repurchase shares under the current share buyback program. On the completion of the separation process, it intends to resume share repurchases.
Fiscal 2016 Performance
Sealed Air reported adjusted earnings per share of $2.66 in 2016, up 3% year over year. Further, earnings beat the Zacks Consensus Estimate of $2.60. Including special items, earnings came in at $2.46 per share, up 52% from the prior year. Total revenue dipped 4% on a reported basis to $6.778 billion in the quarter. Revenues missed the Zacks Consensus Estimate of $6.81 billion.
For 2017, Sealed Air expects sales to be flat compared with 2016 including an unfavorable impact of approximately 3% from foreign currency translation. Adjusted for unfavorable currency, net sales in 2017 are expected to increase approximately 2.5% year over year. Adjusted EBITDA is estimated to be approximately $1.18 billion. Year-over-year growth is anticipated in both Food Care and Product Care divisions' adjusted EBITDA and margins. However, Diversey Care's Adjusted EBITDA margin is expected to remain flat.
Adjusted EPS is projected at approximately $2.70 per share, which assumes approximately $0.14 per share of unfavorable currency translation. Compared with the adjusted earnings of $2.66 per share in 2016, reflects a year-over-year growth of 2%. Sealed Air expects free cash flow to be approximately $600 million in 2017. This includes capital expenditures of approximately $185 million and cash restructuring payments in the range of $85-$100 million. It does not include any material fees associated with the New Diversey tax free spin-off or other strategic alternatives, including a possible sale. Costs of the separation of New Diversey are expected to be managed within existing programs and funds generated as a result of the separation.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been two downward revisions for the current quarter. In the past month, the consensus estimate has shifted downward by 15.78% due to these changes.
Sealed Air Corporation Price and Consensus
At this time, Sealed Air's stock has a great Growth Score of 'A', though it is lagging a lot on the momentum front with a 'D'. However, the stock was allocated a grade of 'C' on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is more suitable for growth investors than those looking for value.
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. It's no surprise the stock has a Zacks Rank #4 (Sell). We are expecting a below average return from the stock in the next few months.