Sealed Air: A Quality Midcap Overcoming Cost Challenges
Children and adults around the world love the joy of stepping on and popping bubble wrap, a product created by Sealed Air Corp. (NYSE:SEE) in 1957. Sealed Air doesn't just make bubble wrap though; the company provides food safety and security and product protection solutions and equipment around the world. It operates through two segments: Food and Protective.
The Food segment offers packaging materials and automation equipment to provide food safety and shelf-life extension, reduce food waste and optimize total costs for food processors in the fresh meat, poultry, seafood and dairy markets. Brands include Cyrovac, Darfresh, Simple Steps and Optidure.
The Protective segment provides foam, inflatable, suspension and temperature assurance packaging solutions to protect goods for e-commerce, consumer goods, pharmaceutical, medical devices and industrial markets. Brands include Sealed Air, Bubble Wrap, Autobag, Instapak, Korrvu, Kevothermal and TempGuard.
Sealed Air was founded in 1960 and currently has a market capitalization of $8.3 bilion.
Bubble wrap
In 1957, two inventors, Alfred Fielding and Marc Chavannes, set out to create a new wall covering by laminating two plastic sheets with air bubbles inserted between the layers. The invention never caught on as an interior decoration, but the two men discovered their new materials light weight and insulating properties were very useful as greenhouse insulation and then as a packing material. The product eventually became known as bubble wrap packaging cushioning. In 1960, Fielding and Chavannes founded Sealed Air with the Bubble Wrap brand as the companys signature brand.
Financial review
The company recently released strong second-quarter earnings and was one of the few companies able to successfully manage the inflationary environment and supply chain issues.
Net sales increased 7.0% to $1.4 billion, which was an increase of 11.0% on a constant currency basis. Net earnings increased 5.0% to $114 million and adjusted Ebitda increased 12.0% to $293 million. Adjusted earnings per share increased 28% to $1.01.
Revenues in the Food segment increased 13% on a constant currency basis. Adjusted Ebitda was $168 million, which was an increase of 6.0%. The Ebitda margin was 20.8% compared to 21.5% in the prior-ear period. The increase in Ebitda was primarily due to favorable price/cost spread and was partially offset by high labor costs and non-material inflation.
Revenues in the Protective segment were $612 million, which was an increase of 9.0% on an organic basis. Adjusted Ebitda increased 18% to $126 million with an Ebitda margin of 20.6%, up 18.1% from the prior-year period.
Total debt at quarter's end was $3.7 billion while cash and equivalents stood at $281 million. The company has $1.1 billion of availability on its line of credit facility. The leverage ratio based on trailing 12-month Ebitda was 2.80.
Valuation
Sealed Air provided updated guidance which includes net sales in the range of $5.85 billion to $6.05 billion and adjusted Ebitda in the range of $1.22 billion to $1.25 billion. The full year forecast for earnings per share is in the range of $4.05 to $4.20.
Analysts' consensus earnings per share estimates for 2022 are $4.15, and for 2023 they estimate $4.43. The company is currently selling for 14 times forward earnings witha forward enterprise-value-to-Ebitda ratio of 9.9.
Using the GuruFocus discounted cash flow calculator, I plugged in $4.15 for earnings per share as the starting point and predicted an 8.0% long-term growth rate, which results in a fair value estimate of approximately $70.00 per share.
Guru trades
Gurus who have purchased or added to their positions in Sealed Air stock recently include Ray Dalio (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio). Gurus who have reduced or sold out of their positions include Murray Stahl (Trades, Portfolio) and Steven Cohen (Trades, Portfolio).
My take
Sealed Air is a well-managed company that is a leader in packaging. The company has executed well on automation processes in its manufacturing operations, which has improved margins and productivity. With below average valuation multiples and solid growth prospects, I believe the company has the makings of a good long-term investment prospect.
This article first appeared on GuruFocus.
