SEE - Sealed Air: The Air Is Floating Out

2023-06-15 18:11:26 ET

Summary

• Sealed Air Corporation has seen a few softer quarters in recent times.
• Lower sales and revenues come just after the company added quite some leverage following the Liquibox deal.
• Appeal for Sealed Air is increasing despite higher leverage and lower earnings, although I require just a bit more of a favorable entry point here.

In November of last year, I believed that there was no air for investors left in Sealed Air Corporation ( SEE ) . After shares had been trading stagnant for quite some time, while the company had seen modest growth and leverage was coming down, the appeal was apparently improving. That was ahead of a big profit warning late into the year, suggesting some real operational weakness in the final part of the year, something which is visible at the start of the 2023 results as well.

A Quick Recap

The story around Sealed Air has been quite eventful, as has its past. All the way back in 2017, Sealed Air sold its Diversey business in a deal which granted the company net cash proceeds of $2.5 billion, leaving the business with a $4.2 billion food care and product segment. Resulting earnings power was seen around $2.00-$2.50 per share, with some leverage still apparent on the books.

Pre-pandemic in 2019, the company has seen modest growth to a near $5 billion revenue base, while earnings came in around $2.50 per share, although that leverage of around 4 times EBITDA was still high. A resulting $10.3 billion enterprise valuation at $43 per share looked largely fair, although that a market multiple in combination with higher leverage and potential threats to the long-term businesses made me not too upbeat on the shares of the business.

On the back of the boom induced by the pandemic, shares rallied to the $70 mark early in 2022. During the 2020 pandemic year, sales were up a modest 2%, yet adjusted earnings rose 13% to $3.19 per share, with leverage down to 3 times.

2021 sales rose 13% to $5.5 billion on the back of increased demand and some inflationary pressures, with adjusted earnings increasing further to $3.55 per share, as the company guided for a strong 2022. In fact, sales were seen at a midpoint of $5.9 billion, EBITDA at $1.22 billion, and earnings at $4.05 per share.

This outlook drove shares higher, but shares fell during 2022 amidst higher interest rates, inflationary pressures, and slower growth. The issue is that is nice growth cadence was broken in the third quarter of 2022, as the company reduced the full year sales guidance to $5.7 billion.

To shed some perspective, that implicitly implied a near 10% cut in the sales guidance for the second half of the year. Amidst inflationary trends, this suggests that volume trends were much worse, more or less confirmed by the fact that the EBITDA and earnings guidance was maintained.

A net debt position of $3.4 billion made that net debt come in below 3 times, as valuations started to look compelling at 11 times earnings. At the same time, Sealed Air announced a $1.15 billion deal to acquire Liquibox, adding $362 million in sales to the business, with net debt up to $4.5 billion, for a 3.5 times leverage ratio. This deal looked a bit expensive, as this simultaneous nature of the deal and the earnings report made that shares fall from $48 to $43 per share, making it hard to disentangle the market reaction to both events.

Given all this, I concluded to be compelled to the shares if they would fall down to the $40 mark.

Coming Down

Since late last year, SEE shares actually saw a sizable recovery to $55 in February, something that I missed out on as I did not initiate a position. Ever since, shares have gradually come down again, in fact, they trade at just $39 at this moment in time.

News has been mixed in 2023, as in January the company issued $775 million in new bonds carrying a 6.125% coupon, not coming in cheap, in anticipation of the Liquibox deal which closed on February 1.

Later in February, the company posted soft fourth quarter results with revenues down 8% to $1.41 billion and operating earnings down a quarter to $228 million, still translating into decent margins. Full year sales came in soft compared to the revised guidance, at $5.64 billion on the back of the softer quarter, although adjusted earnings still came in at $4.10 per share.

It was disappointing to see the 2023 sales outlook at $5.85-$6.10 billion, because at the midpoint of the guidance this implies that essentially all growth is the result of the Liquibox deal. Adjusted EBITDA is seen between $1.25 and $1.30 billion, with earnings seen between $3.50 and $3.80 per share.

The soft fourth quarter performance, and disappointing 2023 outlook, was accompanied by a soft performance for the first quarter of 2023. First quarter sales of $1.35 billion were down 5%, with adjusted earnings of $0.74 per share down a third from the year before. Despite the softer performance, the company maintained the full year guidance, making it obvious that risks are seen to the downside of this guidance. With full year net debt of $4.5 billion, leverage is seen at 3.6 times EBITDA, at the lower end of the guidance.

And Now?

The reality is that we are back to an 11 times earnings multiple for Sealed Air Corporation stock, the same as we saw late in 2022. The difference is that earnings power has fallen some 10% in the meantime, and that includes the contribution of the acquired Liquibox, which increased leverage to more than 3 times again.

Given this, I quite frankly want to see a bit more of an appealing multiple for SEE stock, given the higher interest rate environment. Amidst this, I am pegging the entry point at 10 times earnings, in fact at the lower end of the guidance. This translates into a $35 entry point before I will potentially consider a small position in Sealed Air Corporation stock.

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