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Higher Costs, Unfavorable Foreign Currency Ail Sealed Air

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On Dec 10, we issued an updated research report on Sealed Air Corporation (SEE - Free Report) . The company’s margins are likely to bear the brunt of unfavorable currency, higher input prices and freight charges in the near term. Moreover, weakness in the utility business in the Product Care segment remains a headwind.
FX, Cost Inflation to Dent 2018 Results 
The company projects net sales of approximately $4.7 billion for 2018, down from the previous projection of $4.75 billion. This reflects a constant dollar growth rate of approximately 6%, lower than the previously expected 7%. Adjusted EBITDA from continuing operations is anticipated at $870 million-$880 million, down from the prior guidance of $890-$910 million. Adjusted earnings per share are expected to be $2.40-$2.55, lower than the previous expectation of $2.45-$2.55. The mid-point of the guidance reflects year-over-year growth of 35%, lower than the previously guided 38%.
For 2018, currency headwinds are anticipated to have a negative impact of $40 million on net sales and $10 million on adjusted EBITDA. This is in contrast to the company’s prior forecast which assumed an impact from currency of approximately $20 million and $5 million on net sales and adjusted EBITDA, respectively. Unfavorable currency will impact the Food Care results owing to its exposure to Europe, Latin America and Australia. Further, increasing raw material prices and higher freight charges remain headwinds.  Moreover, Sealed Air continues to invest in R&D, sales and marketing. Even though these investments will drive future growth, it will affect margins in the near term.
Weakness in Utility Business a Concern
At the Product Care segment’s global volumes declined 2% in the last reported quarter.  Notably, this segment generated 39% of the Sealed Air’s third-quarter 2018 revenues. This can be attributed to a decline of 7% in the utility business, which accounts for 30% of Product Care segment’s sales. Competition across the utility portfolio intensified in North America and the U.K. The company also witnessed a slowdown in China owing to tariff uncertainties. Moreover, Sealed Air experienced higher absorption costs in the second quarter of 2018 due to lower global volumes. This will continue to impact results in the fourth quarter of 2018.
Reflecting the above-mentioned headwinds, shares of Sealed Air have lost 28% over the past year compared with the industry’s decline of 14%.
Estimates Moving South
The Zacks Consensus Estimate for fiscal 2018 for earnings is at $2.43, reflecting a 34.25% year-over-year growth. Meanwhile, revenue estimates are pegged at $4.72 billion, a projected year-over-year growth of 6%.
Notably, the Zacks Consensus Estimate for the current-quarter earnings has moved south by 7% in the past 60 days. The Zacks Consensus Estimate for earnings for fiscal 2018 and 2019 has moved down by 3% and 5%, respectively, over the past 60 days.
Sealed Air’s currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the same sector are Enersys (ENS - Free Report) , CECO Environmental Corp. (CECE - Free Report) and Northwest Pipe Company (NWPX - Free Report) , all three carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Enersys has a long-term earnings growth rate of 10%. Its shares have rallied 17% in a year’s time.
CECO has a long-term earnings growth rate of 15%. The stock has surged 66% over the past year.
Northwest Pipe has a long-term earnings growth rate of 10%. The stock has gained 22% over the past year.
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