On Jul 19, we maintained our Neutral recommendation on Sealed Air Corporation (SEE) based on expected benefits from its restructuring programs, leadership changes and recent implementation of price increases that will help counter material cost increases and rising inflation in the second quarter. However, increase in costs due to restructuring, and increase in debt and integration risks due to the Diversey acquisition remain concerns for this specialty packaging service provider.
Sealed Air’s first-quarter adjusted net earnings increased 6% to 17 cents per share. Volume in the Food & Beverage segment moved higher due to strong growth in emerging markets. Adjusted EBITDA benefited from higher volumes, operational efficiencies and reduced expenses. The company expects the recent implementation of price increases to counter material cost increases and rising inflation in the second quarter.
However, the Institutional & Laundry segment continued to be affected from significant exposure to Europe. The segment has the largest exposure to Europe among all Sealed Air’s divisions, with almost half of its sales generated from this region. Overall, Sealed Air generates 33% of its total sales from the European region. With no significant improvement in the economic conditions in sight, we believe results will continue to be affected.
Sealed Air’s Integration & Optimization Program will generate cost savings and benefits of approximately $195 million to $200 million by the end of 2014. The company announced an additional restructuring plan with projected annualized savings of $80 million by 2015. On the flipside, the additional restructuring plan will increase Sealed Air’s costs by $180 million to $200 million by 2015, including $65 million in 2013.
The Diversey acquisition in 2011 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. The integration of Diversey is not yet complete and given the size of the deal, we are apprehensive of integration risks. Even though Diversey has added to the company's growth profile, it also raised its risk due to the high levels of debt the company has incurred to fund the acquisition.
Other Stocks to Consider
Other stocks with favorable Zacks Rank in the same industry are Mobile Mini, Inc. (MINI) and Graphic Packaging Holding Company (GPK) with a Zacks Rank #1 (Strong Buy), and Packaging Corporation of America (PKG) with a Zacks Rank #2 (Buy).
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