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Sealed Air (SEE) Up 9% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Sealed Air (SEE - Free Report) . Shares have added about 9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Sealed Air due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Sealed Air Q3 Earnings & Revenue Top Estimates, Up Y/Y
 
Sealed Air delivered third-quarter 2018 adjusted earnings per share of 61 cents that came in ahead of the Zacks Consensus Estimate of 60 cents and also surged 33% year over year. 
 
Including special items, the company reported net earnings per share of 48 cents, up from net earnings per share of 33 cents in the year-ago quarter.
 
Total revenues increased 5% year over year on a reported basis to 1,186 million in the reported quarter. The figure beat the Zacks Consensus Estimate of $1,184 million. Currency had a negative impact on total net sales of $39 million or 3%. Sales increased across all regions in the quarter under review.
 
Cost and Margins
 
Cost of sales rose 7% year over year to $821 million. Gross profit inched up 1.3% to $366 million. Gross margin contracted 110 basis points (bps) to 30.8% in the third quarter.
 
SG&A expenses fell roughly 8% to $192 million from the prior-year quarter’s figure. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were $219 million in the quarter compared with $217 million in the prior-year quarter. Adjusted EBITDA was partially affected by currency fluctuations as well as higher than expected raw material and freight costs. Adjusted EBITDA margin was 18.5% compared with 19.2% in the prior-year quarter.
 
Segment Performance
 
Food Care: Net sales rose 2% year over year to $727 million. Adjusted EBITDA increased 4% year over year to $145 million. Currency had an unfavorable impact of $8 million on Adjusted EBITDA.
 
Product Care: The segment reported net sales of $459 million, up 11% year over year. Currency had a negative impact on Product Care’s net sales of 1% or $6 million. Adjusted EBITDA decreased 2% to $76 million.
 
Financial Updates
 
Cash and cash equivalents were $191 million as of Sep 30, 2018, down from $594 million as of Dec 31, 2017. Cash flow from operating activities was around $150 million in the nine-month period ended Sep 30, 2018 compared with $333 million in the prior-year comparable period.
 
As of Sep 30, 2018, Sealed Air’s net debt came in at $3.4 billion, up from $2.7 billion as of Dec 31, 2017 owing to use of cash related to working capital, acquisition activity and share repurchases.
 
From Jul 1, 2018 to Oct 31, 2018, the company repurchased around 3.0 million shares for $121 million. This brings the aggregate repurchase for the year to roughly 13.5 million shares or $603 million.
 
Guidance
 
Sealed Air projects net sales of roughly $4.7 billion for 2018, at a constant dollar growth rate of approximately 6%. Adjusted EBITDA from continuing operations is expected in the range of $870-$880 million, a constant dollar growth rate of approximately 6% compared with the prior year. Currency headwinds are anticipated to have a negative impact of $40 million on net sales and $10 million on adjusted EBITDA. Adjusted earnings per share are projected at $2.40-$2.45.
 
The company expects free cash flow for 2018 at around $350 million, based on assumption of capital expenditures of approximately $165 million.
 
The company now anticipates annualized savings of $40 million in 2018 from its existing restructuring program, $10 million higher than its previous expectation. An additional $25 million is expected for 2019. The company is analyzing additional opportunities to redesign its operating model and improve performance.
 
In the Product Care segment, the company experienced higher absorption costs in the third quarter due to lower global volume in the utility business, which contributes around 30% of the division's sales. This along with currency headwinds, and raw material and freight cost inflation will impact results in the remaining part of 2018.
 

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months.

VGM Scores

At this time, Sealed Air has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Sealed Air has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.




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