I am continuing my series of articles looking at stocks that are more “recession-resistant” in order to build up the defensive side of my portfolio. Sealed Air (SEE) came in one of my screens, and I wanted to do some due diligence. I believe the company is a high-quality, safe business that should be considered when talking about long-term investments.
Just a brief background on the company, Sealed Air is a packaging company focused on food (including raw foods) and other products. The company was actually the pioneer of Bubble Wrap, which is one of its main brands alongside namesake Sealed Air, Cyrovac, and Autobag. Bubble Wrap is that plastic with little air pockets used for packaging, and the company has continued to create innovative products along this vein.
The company operates two main segments, namely the Food segment and the Protective segment. The Food segment focuses on packaging materials and equipment to properly “seal” and package raw food products (e.g., that cut of steak at the grocery store). Proper packaging enhances food safety and extends shelf life. In 2019, the Food segment made up approximately 60% of total revenue. The Protective segment creates those plastic packaging with air in them that are designed to protect valuable goods while in transit. You may have seen them when you opened your Amazon (AMZN) package. This segment benefits from the current e-commerce trends, as more products are being shipped directly to consumers, thus increasing the need for protective packaging. In 2019, this segment represented 40% of total revenues. In each segment, the company competes against other manufacturers that create similar products or packaging made with other types of material (like foam, paper, plastic, etc.)
The company’s long-term competitive advantage lies with the scale of its operations and its continued innovation. Sealed Air operates in 124 countries, and in 2019, 48% of its Net Sales were from outside the US. The company continues to innovate at the product front as well. It had R&D expense of $77 million, $81 million, and $92 million in the years (2019, 2018, and 2017) and operates multiple design and innovation centers worldwide. R&D represented 1.6% of 2019 revenue, which is decent for an established manufacturing firm. The benchmark I use is about 2% of revenue. The company currently has 2850 US and foreign patents, and files on average 270 patents annually.
Source: Company Investor Presentation
We can see the fact that the company is a defensive business by examining the Q2 2020 results. Despite challenges due to the coronavirus pandemic, Sealed Air’s revenue for the quarter was down only 1%. In fact, adjusting for currency fluctuations, revenue was actually up by 3% during the quarter. The company recorded revenue of $1.2 billion for Q2 2020. For the quarter, it reported net earnings of $100 million. Due to the ongoing company restructuring efforts, comparing quarter-over-quarter results is a little muddy. However, looking at Sealed Air’s EBITDA, we can see that this has increased by 10% to $260 million at the end of the quarter. This indicates to me that the company is growing its operating earnings at a healthy rate.
Looking on a per segment basis, the Food segment revenue was down by 5% compared to the same time last year. This decrease was primarily driven by food processing plant closures, restaurant industry slowdown, and lower equipment sales. All of these factors are directly tied to the effects of the coronavirus-related disruptions. Despite these disruptions, the results were not too bad, as these declines were offset by the strength in the grocery market products. As people stocked up on supplies, this benefited Sealed Air in terms of the amount of packaging materials sold.
In the protective segment, organic sales were down by 8%, with the slowdown in global manufacturing offset by the increase in e-commerce and distribution of essential goods. As more people order online, more protective packaging would be needed for a variety of goods. Note that a company acquisition’s revenue contribution actually pushed this segment’s results to an increase of 6% of revenue quarter over quarter. Overall, I think the results were pretty good and demonstrate the resilient nature of the business.
Source: Company Investor Presentation
In 2019, the company started a new three-year restructuring program called “Reinvent SEE” to gain annual cost savings of $215-230 million by 2022. The strategy focuses on initiatives revolving around new products and R&D, as well as cost efficiency and channel optimization.
One of the main goals of this initiative is in the realm of sustainability. There has been increased awareness in recent years regarding the harm plastic packaging is doing to the environment. Certain state governments have already made regulations trying to curb plastic waste, and I think these efforts will only intensify in the years to come. Regulations on the use of plastic packaging is a key risk that firms like Sealed Air are facing in the long term, and it is important for the company to “stay ahead of the curve”. Sealed Air has pledged 100% recyclable materials and 50% of its products made from recycled content by 2025. The company seems on track to meeting these goals, as its Bubble Wrap product is now over 60% made from recycled content. Furthermore, it made a $2.5 million equity investment in Plastic Energy Global and will jointly pursue R&D to further the recyclability of plastic waste.
Sealed Air’s commitment to keeping costs low and continued innovation can be seen in its results. For the last 5 years, the company had an average EBIT margin of 14.9%, which is on the top-end of its peer group. A risk it faces though is with regard to its current debt level, which is a bit on the higher side. Sealed Air has long-term debt of $3.7 billion against total assets of $5.8 billion. The company also has negative stockholders’ equity of $70 million, which means the book value of the firm is negative. It generated $511 million in cash from operations in 2019 and is on track to meet or exceed that figure in 2020. Furthermore, the company has no debt maturity until 2022, ensuring that it will have enough liquidity in case of a prolonged global recession. This high leverage may be the reason Sealed Air is trading at not too expensive valuations. Currently, the company is trading at a forward P/E ratio of 15x earnings and pays a healthy dividend of 1.5%. Given the generally stable and defensive nature of its business, I am not too worried about the high leverage. In fact, the company should see a bump up in earnings as it continues to de-lever its balance sheet. I think Sealed Air is a Buy.
Author calculations using data from Seeking Alpha
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SEE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don’t know you or your specific circumstances, therefore, your tolerance and suitability to take risk may differ. This article should be considered general information, and not relied on as a formal investment recommendation.