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Still Neutral on Sealed Air

We maintain our Neutral recommendation on Sealed Air Corporation (NYSE:SEE - News) given concerns regarding the Diversey integration risks, added debt and interest burden and significant exposure to Europe that overwhelm the company’s positives – focus on expanding in emerging markets, benefits from the Diversey acquisition and a better volume performance than its peers. The company retains a Zacks #3 Rank, which implies a Hold recommendation for the short term.

Sealed Air reported third-quarter adjusted EPS of 48 cents versus 43 cents in the year-ago quarter, beating the Zacks Consensus Estimate by a penny. Total revenue increased 10% year over year to $1.25 billion, slightly above the Zacks Consensus Estimate of $1.23 billion.

Sealed Air lagged its competitors -- Bemis Company, Inc. (NYSE:BMS - News) and Sonoco Products Co. (NYSE:SON - News) in the third quarter. While Bemis reported EPS of 56 cents, a 2% decline from the prior-year quarter, Sonoco reported EPS of 66 cents, a penny above the year-earlier quarter.

However, one thing worth mentioning is a 1% increase in Sealed Air’s volume, much better than Bemis and Sonoco, which suffered declines. Sealed Air expects continued year-over-year volume growth in the fourth quarter, albeit at a slower pace than previously expected.

For the fiscal 2011, Sealed Air lowered its EPS guidance to between $1.70 and $1.75 from the previous $1.75 to $1.85, reflecting the slowing pace of economic growth, acquisition related costs and interest expense on the debt issued to finance the Diversey acquisition and debt repayment. The Zacks Consensus Estimate for the year stands at $1.70, at the lower end of the company’s guided range.

Sealed Air’s recent acquisition of Diversey will expand its presence beyond specialty packaging solutions with access to a $40 billion chemical cleaning and hygiene industry. This combination is expected to enhance Sealed Air’s earnings per share and free cash flow generation.

The company will further reinforce its global footprint and be uniquely positioned to capitalize on the need to improve hygiene and food safety standards in developing markets. The integration is underway and the company expects to achieve cost synergies of $30 million by the end of 2012 and $50 million by 2013.

The Diversey acquisition is the second largest in the company’s history, behind the $4.8 billion purchase of the Cryovac food-packaging business in 1998. Given the size of the deal, we are apprehensive of integration risks. On top of that, Sealed Air has incurred a debt to fund the Diversey takeover and the acquired debt. The rise in debt levels and the consequent increase in interest burden remain concerns.

Sealed Air has significant exposure to Europe (27% in fiscal 2010) and the combination with Diversey will generate 37% of its revenues from the region. Given the economic uncertainty in the region, revenues are at risk. All said, we prefer to maintain a Neutral stance on Sealed Air.

Elmwood Park, New Jersey-based Sealed Air Corp. is a major specialty packaging services provider catering to a diverse set of end-markets. The company operates in the United States and in 50 other countries. The company reports its operations in four segments: Food Packaging, Protective Packaging, Food Solutions and Other Category.

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