Sealed Air Corp.: Packing Potential Gains

• Sealed Air (SEE) April 14, 2009 (9:45 EST) $14.35
• 52-week range: $10.38 (Mar. 3, 2009) - $28.32 (Apr. 25, 2008)
  
• Dividend = $0.12 quarterly = 3.34% current yield

Sealed Air makes a wide variety of standard and high-tech packaging materials and equipment systems for food, industrial, consumer and medical applications. Brand names include Instapak, Jiffy, and Cryovac. Non-US sales were about 55% of total 2008 revenues of $4.843 billion.

The company is economically sensitive and sales and earnings are likely to drop again this year. EPS peaked at $1.65 in 2007 before falling to $1.39 last year. Zacks now carries estimates of $1.32 and $1.48 for 2009 and 2010 respectively.

Why should you want to get involved now? Valuation. At the current quote of $14.35 these shares are trading at < 10.9x the already reduced 2009 estimate and 9.7x 2010’s expectations. Value Line notes that SEE has a 10-year median P/E of 22x making today’s multiple less than half of the historical level. This is especially attractive if you believe that we are nearing the bottom of the current economic cycle.

Dividends were initiated in 2006 and raised in both 2007 and 2008. The current yield of 3.34% is better than the coupon on treasuries and CDs and appears safe at a payout ratio of just over 36% of this year’s earnings

The last seven insider transactions (dating back to May 5, 2008) were all buys with the most recent four taking place from Jan. 23 - Mar. 4 of this year.

Morningstar assigns Sealed Air their highest (5-Star) rating and gives them a $25 'fair value'.

Here are the last few years per share numbers (as reported by Value Line):

Year …... Sales …... C/F ….. EPS ….. Div …..... B/V ….. Avg. P/E
2003 ….. 20.76 …. 2.07 …. 1.00 ….. Nil …..... 6.60 ..… 22.7x
2004 ….. 22.79 …. 2.25 …. 1.13 ….. Nil …...…8.00 …… 22.1x
2005 ….. 25.07 …. 2.53 …. 1.35 ….. Nil …...…8.54 …… 18.9x
2006 ….. 26.82 …. 2.68 …. 1.52 ….. 0.30 ….10.26 ……18.2x
2007 ….. 28.78 …. 2.98 …. 1.65 ….. 0.40 ….12.50 ……17.5x
2008 ….. 30.68 …. 2.72 …..1.39 ….. 0.48 ….12.19 ……15.7x

A return to even 15x this year’s $1.32 estimate would bring SEE shares back to $19.80 or + 37.9% from here. Add in the 3.34% dividend and the total return prospects look very bright.

Is a $19.80 target price achievable? The calendar year highs in each year from1997 through 2008 ranged from $23.50 (during 2001’s recession) to $33.90 (in 2007’s heady market). From 2004 right through most of 2008 the absolute lows were $22.00 and up.

If you’re still hesitant to play because of general market fear here’s a more conservative play from now until next January:

…………………………….........….. Cash Outlay ……… Cash Inflow
Buy 1000 SEE @$14.35 ……………$14,350
Sell 10 Jan. $15 calls @$1.85 …………………......…….. $1,850
Sell 10 Jan. $12.50 puts @$1.60 ………………….…….. $1,600
Net Cash Out-of-Pocket ……………..$10,900

On expiration date (Jan. 15, 2010) if SEE shares are > $15 :
[Just 4.53% above today’s price].

• Your $15 calls will be exercised.
• You will sell your shares for $15,000.
• Your $12.50 puts will expire worthless (a good thing for you as a seller).
• You will have received $360 in dividends.
• You will have no further option obligations.

You now have $15,360 cash for your original outlay of $10,900.

That’s a best case scenario profit of $4,460 or + 40.9% total return
on shares that only needed to rise by < 6%.

What’s the static return if SEE shares go nowhere?

On expiration date (Jan. 15, 2010) if SEE shares are still $14.35:

• Your $15 calls will be expire worthless.
• You will still hold 1000 shares worth $14,350.
• Your $12.50 puts will expire worthless (a good thing for you as a seller).
• You will have received $360 in dividends.
• You will have no further option obligations.
• You will have $14,710 in cash and stock for your original outlay of $10,900.

That’s a profit of $3,810 on your original outlay of $10,900 or + 34.9%
on shares that did not move up.

What’s the risk?

If SEE goes below $12.50 before Jan. 15, 2010:

• Your $15 calls will expire worthless.
• The $12.50 puts will be exercised.
• You will be forced to buy another 1000 shares and to lay out an additional $12,500 cash.
• You will end up owning 2000 shares of SEE.
• You will have no further option obligations.

What’s the break-even point on the whole trade?

On the original 1000 shares it’s their $14.35 cost less the $1.85 /share
call premium = $12.50 /share.

On the shares that were ‘put’ it’s the $12.50 strike price less the $1.60 /share put premium = $10.90 /share.

The break-even on the whole trade is the average of these: $12.50 + $10.90 / 2 = $11.70 /share.

Sealed Air shares never changed hands for under $12 even once from late 2002 right through 2008. The forward P/E at the $11.70 break-even price would be < 8.9x and the dividend yield would be 4.1%.

Disclosure: Author is long Sealed Air shares and short Sealed Air options.

Comments

[Paul Price:]

Zacks makes Sealed Air their "Bull of the Day" stock...








Bull of the Day


Sealed Air Corp. (SEE)


By: Zacks Equity Research
November 17, 2009

Sealed Air Corporation ([url=javascript:void(... - Analyst Report) reported third quarter 2009 EPS of 38 cents, above the Zacks Consensus Estimate of 33 cents and the prior-year EPS of 28 cents. The company raised its full-year 2009 EPS guidance to a range between $1.37-$1.45.

The company expects to continue to realize benefits from its cost reduction and productivity programs in the fourth quarter. Also, the company is witnessing improved market conditions in developing nations. Sealed Air posted double-digit sales increases in some of these markets.

Based on the improved outlook, as well as the company's efforts to revitalize its bottom-line, we are upgrading the rating on the stock to Outperform.

Nov 17 08:19 AM