Sealed Air to Underperform

We have recently downgraded our recommendation on Sealed Air Corporation (SEE - Analyst Report) from Neutral to Underperform. The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates strong downward pressure on the stock over the near term.

Sealed Air’s first-quarter 2012 adjusted net earnings dropped 47% to 18 cents per share, missing the Zacks Consensus Estimate of 21 cents. However, total revenues increased 70% year over year to $1.92 billion, beating the Zacks Consensus Estimate of $1.91 million.

For fiscal 2012, the company expects adjusted earnings in the range of $1.50–$1.60 per share and cash earnings in the range of $2.10–$2.20 per share. Net sales are expected to remain on the lower end of the previous guidance of $8.2–$8.3 billion. The Zacks Consensus Estimate for EPS is currently at $1.43, well below the guidance range while revenues are at $8.2 billion, at the bottom end of the of the company forecast.

Sealed Air acquired Diversey, a provider of a wide range of products and services for use in food service, food and beverage manufacturing and processing, floor care, restroom care and other housekeeping, and laundry in October 2011. 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 from W.R. Grace & Co.Given the size of the deal, we are apprehensive of integration risks.

To fund the acquisition and to repay the existing debt of Diversey, Sealed Air entered into the Credit Facility consisting of a $1.1 billion Term Loan A Facility, a $1.2 billion Term Loan B Facility and a $700 million Revolving Credit Facility.

As of March 31, 2012, Sealed Air’s debt-to-capitalization ratio was at a high of 62% compared with 36% as of September 30, 2011, which was prior to the acquisition. The rise in debt levels and the consequent increase in interest burden remaina matter of concern.

Sealed Air’s first-quarter results suffered from low volumes at the acquired Diversey business, mainly due to weakness in Europe and an unfavorable mix. Given that 52% of Diversey’s sales come from Europe, with no significant improvement in the economic conditions in sight, the results will continue to remain affected.

Furthermore, raw material cost inflation is expected to be between 3% and 5% during 2012, with resin costs flattening during mid-2012 and then increasing towards the end of the year. Even though Sealed Air had implemented additional pricing actions in the first quarter and some coming into effect in the second, many of those benefits will not be realized until late in the second quarter.

Given the scenario, we have downgraded our recommendation on Sealed Air from Neutral to Underperform.

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, Diversey and Other. Sealed Air competes with the likes ofBemis Company, Inc.(BMS - Analyst Report) andSonoco Products Co.(SON - Analyst Report).