Sealed Air Corp. (SEE) reported fiscal first-quarter 2010 earnings on April 28, beating the Zacks Consensus Estimate by a cent. However, shares fell with the earnings news given concerns regarding the continued weakness in Western Europe, including the weakening euro and current erratic resin environment.
Below we will cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the short-term and long-term outlook for the stock.
First Quarter Earnings Highlights
Sealed Air exceeded the Zacks Consensus Estimate driven by volume growth across all its businesses. Sales increased 7% to $1.06 billion, driven by favorable foreign exchange rates and higher volumes, partially offset by lower price/product mix.
Performance was led by the Other Category segment with a revenue jump of 12%, followed by 9% at Protective Packaging, Food Solutions up 7% and Food Packaging by 5%. Region-wise, Asia-Pacific and Latin America showed strength, but Western Europe remained weak.
Cost of sales increased 8% due to higher resin costs, and marketing, administrative and development expenses were up 6%. On the margin side, gross margin plunged 63 basis points, operating margin was down 36 basis points and net margin dropped 14 basis points.
The company expects an EPS (earnings per share) of $1.50–$1.70 per share for full-year 2010 driven by a 4% to 6% growth in constant dollar sales. The company expects volume growth to be strong and expects the pricing actions implemented in the first quarter to offset higher resin costs and yield benefits starting late in the second quarter of fiscal 2010.
Sealed Air expects capital investments in the range of $80 million to $100 million and to be utilized for maintenance and growth projects.
Sealed Air had cash and cash equivalents of $627.5 million as of March 31, 2010 compared to $694.5 million as of December 31, 2009. Free cash flow decreased to $97.2 million in the quarter from $159.8 million in the previous year, primarily due to an increase in inventory. Total debt-to-capitalization ratio was 41% as of March 31, 2010 compared to 43% as of December 31, 2009.
(Read our full coverage on this earnings report: Sealed Air Meets Consensus)
Earnings Estimate Revisions – Overview
Estimates have not shown any substantial improvement since the earnings release reflecting analysts’ cautious reaction to the stock. They remain concerned regarding the pace of volume recovery in Western Europe and the ability of the company to counter increased resin costs with the help of new pricing strategy. Share prices revealed a downward trend as well, which was not very inspiring. Let’s delve further into the earnings estimate details.
Agreement of Analysts
There seems to be no general agreement among analysts regarding the outlook on Sealed Air. Over the last 30 days, out of 12 analysts covering the stock, 3 analysts have upped their estimates for 2010 while 2 analysts have lowered them. The scenario reverses in 2011, with 2 analysts raising their estimates and 4 decreasing their estimates.
Over the past 7 days, the outlook seems to worsen as none of the analysts made any upward revisions, and in 2010 and 2011 estimates have been lowered by one analyst, due to a less favorable outlook for price/resin cost spread and the sluggish conditions in Europe.
Magnitude of Estimate Revisions
Earnings estimates for 2010 inched up 1 penny from $1.60 to $1.61 since the earnings announcement. However, estimates remain unchanged for 2011. This does not look quite promising, and given the more robust upward estimate revisions for other stocks, we believe it’s not worth being on board.
Sealed Air in Neutral Lane
Sealed Air is pursuing a multi-year global manufacturing strategy to revitalize its bottom-line. The major initiatives include the expansion of global production in growing markets such as China, Eastern Europe and Mexico, increasing operating efficiency and implementation of new technologies.
The company has already realized total savings of $45 million and expects to achieve incremental savings of $10 million in 2010. The company is witnessing improved market conditions in developing nations where the company posted double-digit top-line growth.
However, the company expects to offset higher resin (its principal raw material) costs with an increase in price, though this would get negated in the face of intense competition. Further, North America and Europe remain weak. This leaves limited space for above-market performance by the company.
Given the lack of upward estimate revisions, it is no surprise that Sealed Air shares are maintaining a Zacks #3 Rank, which translates to a short-term Hold recommendation. Our long-term recommendation for the stock remains Neutral due to the abovementioned concerns.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
Read the full analyst report on “SEE”
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