Our more detailed report analysis is available (published February 8th), but the Sealed Air thesis summary is as follows:
Sealed Air Corp. (SEE) shares have significantly underperformed the market ever since the company's $4.3 billion Diversey acquisition announcement in the summer of 2011. Investors were not fans of the pro forma leverage from this transaction, the estimated synergies seemed too low, and the acquisition target had too much European exposure. In the past 6-9 months, SEE has made significant strides by increasing its cost synergy & savings estimates, replacing its questionable management team (CEO and CFO), and has communicated a focus on de-levering and returning cash to shareholders. The stock, however, is still not back to its pre-acquisition levels as concerns about depressed EBITDA margins and an ongoing litigation settlement (discussed in this report) continue to overhang the stock. As detailed in our report, we view SEE's margin hit as short-term (and "trough") in nature, we think SEE's incoming CEO is the perfect man to oversee Diversey's integration and synergy optimization, and we are expecting the company's W.R. Grace settlement overhang to soon be part of the past.
Sealed Air ("SEE") is a global leader in food packaging, safety & security, facility hygiene and product protection. The company serves a variety of end markets including food & beverage ("F&B") processing, retail, healthcare, industrial, commercial and consumer. SEE has traditionally been associated with brands such as Bubble Wrap cushioning and Cryovac food packaging solutions, but in October 2011 it acquired Diversey, a cleaning and hygiene solutions service company (previously owned by the Johnson family and Clayton, Dubilier & Rice), in an effort to enter the higher margin sanitation market.
SEE's new segment reporting includes (1) Food & Beverage, (2) Institutional & Laundry, and (3) Protective Packaging.
Food & Beverage ("F&B")
The F&B industry is roughly $50 billion in size, with LT growth rates of 2-3% per annum through 2016. This sector is considered relatively stable (a global GDP-type business), as F&B are not quite discretionary end markets (people need to eat and drink). Higher growth regions are clearly LatAm, Asia and the Middle East, as these regions are benefiting from population growth, rise of middle class, and increasing protein-based dietary habits.
Institutional & Laundry ("I&L")
The I&L industry is roughly $30 billion in size, with LT growth rates of also 2-3% per annum through 2016. SEE's main competitor here is Ecolab, which holds ~20% of the global cleaning market. Meanwhile, SEE just entered this market pursuant to its Diversey acquisition and now holds >7% market share, and is either #1 or #2 in its subcategories.
Protective Packaging ("PP")
The PP industry is roughly $16 billion in size, with a LT growth rate of ~3% per annum through 2016. This sector is a more specialized type of packaging service sector, with SEE and competitors administering packaging solutions to customers that provide efficiency and sustainability all the way from the factory to the customer.
SEE Value Drivers and Catalysts:
We think it's safe to say that SEE's packaging segments and products are (1) best-in-class, (2) relatively stable, and (3) deserve a multiple in-line with peers. One could argue it deserves a slight premium because of its exposure to developing countries and also because of its above-average R&D program spend, but let's say conservatively 8x is appropriate.
The biggest value drive of SEE stock is going to be the gradual turnaround and development of its Diversey (or soon-to-be "Institutional & Laundry") business. Margins are clearly lagging those of its main competitor Ecolab (ECL), as Diversey generates 7-8% EBITDA margins (on an LTM basis) vs. ECL at 18%. The reasons for this are detailed in our full report.
On a segment valuation basis, if you take the Diversey business as is, and apply a multiple discount to it (compared to ECL's 12.4x multiple), you get an implied stock price of the SEE enterprise at around $15/share (our downside). This also assumes an 8x multiple for its other packaging businesses.
Now, in a second scenario, if you believe that management's plan of 1-2% margin expansion from cost-synergies will be accurate, then you assume margin expansion from other opportunities (which management is working on) such as price increases, product optimization, supply chain projects (i.e., new and more efficient Brazilian plant in 2Q'12), and euro stability; then a 14% EBITDA margin doesn't seem too aggressive. This is still 400bps below its direct competitor, and at the same level as its more commoditized packaging businesses. At an 11x multiple, this yields us a $28/share SEE stock price.