SEE - Sealed Air Corporation: No Longer A Sealed Deal

2023-08-15 18:39:47 ET

Summary

• Sealed Air Corporation's full-year guidance was dramatically cut, leading to a cautious outlook and a lower entry target for investors.
• The company's sales and earnings have been impacted by volume declines and a poor track record, reducing its appeal.
• The cut in the guidance, along with high leverage and disappointing earnings, has rightfully led to a decrease in Sealed Air Corporation's stock price.

Two months ago, I believed that the air was floating out in the case of shares of Sealed Air Corporation ( SEE ) . This came after the business had seen a few softer quarters, which came just after the company added quite some leverage with the Liquibox deal.

Appeal was on the increase amidst a lagging share price and a lower earnings multiple, despite the increase in leverage, as I was waiting for a more favorable entry point at the time. I saw risks to the guidance after a soft first quarter.

The shortfall in the guidance became painfully evident alongside the second quarter earnings report. A dramatic cut in the full year guidance makes me cautious, as I am lowering my entry target based on the new information, not seeing great appeal here, with leverage shooting up dramatically as well.

The Base Case

Sealed Air came into its current existence after the company sold Diversey in a deal which netted the business $2.5 billion back in 2017. Following this deal, Sealed Air became a $4.2 billion food care and product business, with earnings power pegged around $2.00-$2.50 per share, as the business still torched along some net debt despite the Diversey sale.

Ahead of the pandemic, that is the year 2019, the company had grown sales to $5 billion while posting earnings around $2.50 per share. Leverage ratios were high around 4 times EBITDA, as the business supported a $10.3 billion enterprise valuation at $43 per share.

With demand for its products on the rise following the rise of e-commerce in the wake of the pandemic, shares rallied to the $70 mark early in 2022. While the 2020 sales numbers were slightly flattish at positive 2%, the real impact was seen in 2021 when sales rose 13% to $5.5 billion, as adjusted earnings advanced to $3.55 per share.

The company originally guided for 2022 sales at $5.9 billion, EBITDA at $1.22 billion and adjusted earnings of $4.05 per share. After a strong first half of the year, the company had to cut the guidance in the second half of the year. Trying to ignite some appeal into the shares, the company announced a $1.15 billion deal for Liquibox, adding $362 million in sales to the business, while pushing up net debt to $4.5 billion, for a 3.5 times leverage ratio.

In the end, full year sales only rose to $5.64 billion, as fourth quarter sales were down by 8% to $1.41 billion. Despite the softer end to 2022, the company still earned $4.10 per share for the year.

The 2023 guidance was soft, seen at $5.85-$6.10 billion, as that essentially implies that the core business is not seeing any growth, with revenue growth driven by the acquisition. Moreover, EBITDA was seen between $1.25 and $1.30 billion, with earnings actually seen down to $3.50-$3.80 per share.

2023 Starts Soft

The company started 2023 on a soft note with first quarter sales down by 5% to $1.35 billion, and adjusted earnings of $0.74 per share being down by a third. While the company maintained the full year guidance, it was clear that the risks were arising to the downside. Trading at 11-12 times earnings, I failed to these the appeal given the adjusted earnings, negative growth, high leverage and poor track record, as I reduced my targeted entry point to $35 per share.

As it turned out, shares rallied from the higher thirties in June to highs in the mid-forties in July, as they have now sold off to $36 and change. The reason for that is the second quarter earnings report , as released in August. Quarterly sales of $1.38 billion were down by 3%, and down by 1% in constant currency terms. That number is very disappointing however as Liquibox contributed $75 million in sales and pricing another 2%, with volume declines of 8% having an outsized impact on the results.

EBITDA fell from $293 million to $280 million, but this is of course disappointing given the deal which the company closed. Amidst this continued shortfall, the company now sees full year sales at just $5.4-$5.6 billion, actually down from 2022. On top of a nearly half a billion cut in the full year sales guidance, the adjusted EBITDA guidance was cut to a midpoint of $1.10 billion, down by $175 million from the initial guidance. This means that adjusted earnings per share are now seen at just $2.85 per share, down nearly a dollar from the initial guidance.

With net debt reported at $4.7 billion, higher than the pro forma numbers on the deal announcement (due to a big tax payment), the leverage ratio will come in at 4.3 times based on the adjusted EBITDA forecast, much worse than a guided 3.7 times leverage based on the initial guidance.

And Now?

Needless to say is that the situation now is entirely different as I believe that the cut in the full year guidance is significant, with sales down by about 10%, the EBITDA guidance trimmed by roughly 15%, and earnings per share seen down by a quarter. Hence, the thesis, including a desired entry point at $35 is no longer valid, for starters because earnings multiples have risen quite a bit, but moreover that leverage is a greater concern here.

While the company points towards new cost-cutting initiatives, we have heard this story all before, and quite frankly I am not impressed with management here. This means that I am dramatically cutting my entry target from $35 to $30, and while it makes sense that weakness was seen (with many customers posting volume declines), the shortfall is quite big here.

Quite frankly I am less attracted to Sealed Air Corporation shares now at $36 than I was a few dollars higher back in June. While I saw risks to the guidance, the shortfall in the new guidance is huge on all fronts, and make me quite cautious, as the risk-reward has certainly not improved in my view here.

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