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Sealed Air Up 30% YTD After 29% Drop in 2018: What's Next?

Zacks Equity Research

Sealed Air Corporation SEE has commenced 2019 on a promising note with the stock gaining on the back of stellar fourth-quarter 2018 results, 2019 outlook, and the Reinvent SEE Strategy, which the company announced in December. The stock had suffered a setback in 2018 primarily owing to the incremental input costs on account of imposition of tariffs and higher freight charges.

Shares of the company had tanked 29.3% in 2018, compared with the industry’s decline of 19.3%. However, the stock staged a comeback this year, rallying 29.6% year to date, outperforming the industry’s growth of 14.8%.



What Dragged the Stock Down in 2018?

Increasing raw material prices and higher freight charges weighed on the company’s bottom line. Further, unfavorable foreign currency was a headwind. Given that approximately 49% of the company’s sales in 2018 were generated outside the United States. A stronger U.S dollar affected Sealed Air’s sales and earnings. In the Product Care segment, volumes were up in North America but the same declined in the U.K. and China. While the U.K. is going through an uncertain economic environment, China is facing challenges owing to the trade war.

Factors Favoring the Stock in 2019

The stock has recovered so far this year driven by investors’ optimism in the company’s ability to counter the input cost inflation through pricing actions, and anticipated savings from restructuring programs.

For fiscal 2019, the company anticipates net sales at $4.8 billion, reflecting year-over-year growth at approximately 2% on as reported basis and 5% in constant dollars. Adjusted EBITDA from continuing operations is anticipated to be $925-$945 million for 2019, up 4-6% from 2018. The company forecasts adjusted EPS to be in the range of $2.65 to $2.75, compared with the adjusted EPS of $2.50 in 2018.

In December 2018, Sealed Air announced a reformation plan — Reinvent SEE Strategy — along with a fresh restructuring program, in a move to drive growth and margins. The new strategy is focused on innovations, SG&A productivity, product-cost efficiency, channel optimization and customer-service enhancements. The strategy will help the company deal with critical packaging challenges, in turn improving customer services.

One of most vital aspects of this strategy involves investment in technology and resources focusing on new and existing high-growth markets. This step will double Sealed Air’s innovation rate over the next five years. The company also aims at simplifying its operational structure and expanding SEE Operational Excellence by upgrading end-to-end processes throughout the company. Further, Sealed Air will be able to drive market share in existing and adjacent markets by leveraging the company’s extensive distribution network. It will continue to invest in digital systems and processes, in order to enhance cycle time and awareness. Consequently, the new strategy will fuel Sealed Air’s growth by supporting packaging innovations for fresh food and e-commerce, and increasing operating leverage target above 40% per year, beginning in 2019.

Sealed Air’s Reinvent SEE strategy includes a new three-year restructuring program that is anticipated to drive total annualized savings in the range of $215 million to $235 million by the end of 2021. The company will combine the new program with its ongoing restructuring program. The existing program will be completed this year while the new program will be concluded by the end of 2021. Both the programs are likely to lead to total annualized savings of $240-$260 million from 2019 through 2021. In 2019, total annualized savings from both programs are expected to be approximately $70 million.

Expected benefits from reducing costs, driving operational excellence, commercializing new innovations and favorable global business trends position the company well for improved results. Sealed Air’s top line will be supported by enhanced demand for its core product portfolio, recently-introduced innovations, strong fresh food markets and e-commerce sector. The company is witnessing increased demand for essential and high-performing packaging solutions that extend shelf life, reduce waste and drive customer productivity.

Zacks Rank and Stocks to Consider

Sealed Air currently carries a Zacks Rank #3 (Hold).

Meanwhile, investors interested in the Industrial Products sector can consider better-ranked players like Mueller Industries, Inc. MLI, Albany International Corp. AIN and Avery Dennison Corporation AVY. While Mueller Industries and Albany International sport a Zacks Rank #1 (Strong Buy), Avery Dennison carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Mueller Industries has expected earnings growth rate of 2.2% for 2019. The company’s shares have rallied 32% year to date.
 
Albany International has estimated earnings growth rate of 44.7% for the ongoing year. The company’s shares have gained 13% year to date.

Avery Dennison has projected earnings growth rate of 8.4% for the current year. The stock has appreciated 22% year to date.

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