Sealed Air: Investors Like this Stock - With Good Reason

Sealed Air Corp. (SEE) keeps its customers' products under wraps. Sealed Air's largest product segment, Food Packaging, produces Cryovac shrink films, absorbent pads, and foam trays used by food processors and supermarkets to protect meat and poultry. Its Protective Packaging segment produces Bubble Wrap, Instapak foam, Jiffy envelopes, and Rapid Fill inflatable packaging systems. Nonpackaging products include adhesive tape, solar pool covers, and recycled kraft paper. Sealed Air estimates its products reach about 80% of the world's population.

One of the main ingredients in specialty protective wrap is resin. Its cost can have a dramatic effect on the bottom line of Sealed Air. Fortunately, over the last few months, the cost has been decreasing. Sealed Air uses about 1.4 billion pounds of the stuff each year. Any more price reductions will flow right through to net profits.

The other side of that welcome news is that competition also gets to buy it at a lower cost. The competitors may reflect that in the price they charge their customers. That would increase their market share if Sealed Air doesn't follow suit. It hasn't happened yet, but it might. Because Sealed Air makes a better and somewhat differentiated it may be able to hold on to the price hikes it recently initiated. Time will tell.

Selling its protective wrap around the world means new production facilities are needed, particularly in China and Latin America. The company is building new ones in both regions so capital expenditures will rise over the next few quarters. It already has a small position in Southeast Asia so moving into China should not be a problem. With increased overseas capacity, efficiencies should improve as well as lower supply costs. Another reason for improved sales: the food packaging group should benefit from higher beef demand in developed markets over the next few years.

The company initiated a dividend a year ago, starting at 30 cents a share annually. It's already raised that to 40 cents (up 33 1/3%). Its strong cash flow will comfortably handle the larger payout. Also look for some of that cash to be used for stock buybacks and/or reducing debt which is 53% of the balance sheet.

Analysts are looking for good growth in profits as efficiencies begin to show. While sales are expected to only increase by 5% a year, on average, over the next 5 years, anticipate earnings to improve by 12% a year, on average, in the same time frame. Earnings were $1.52 in 2006. Expect $1.70 in 2007, then $1.95 in 2008.

Sealed Air recently split its stock 2 for 1. Now it's trading near an all time high (split adjusted). Investors like this stock, with good reason. Whether the current price reflects all of the goodness expected is the question. If the company can hold onto its recent price hikes, expand its markets, and improve efficiencies, it seems like it will deliver and maybe even exceed expectations. But watch out for the price of resin.

The Good: Hitting new highs, earnings increasing.
The Bad: Valuation is relatively high.
The Ugly: Raw materials can wreak havoc with the bottom line.

SEE 1-yr chart

Disclosure: none

Comments

[Long-ShortGuy]

Is this a threat?
<blockquote>
<b>Wal-Mart throws its weight behind push to cut back on packaging</b>

Marketers have plenty of reasons to cut down on packaging for their products - as a way to reduce costs, for example, or to address growing environmental concerns. But there is an even more powerful motivator starting to nudge them along: Wal-Mart.

The world's largest retailer, famous for twisting its vendors' arms to get them to lower their prices, has begun pressuring its 66,000 vendors to get rid of excess packaging...
</blockquote>

Source:
<b>Wal-Mart throws its weight behind push to cut back on packaging</b>