Almost Green Studio
Investment action
I recommended a hold rating for Sealed Air Corp. (NYSE:SEE) when I wrote about it the last time, as I saw visible weakness in the business over the course of 2H23. Based on my current outlook and analysis of SEE, I recommend a hold rating. I still think the outlook for SEE is not great. While there are some positive early indicators, the overall demand outlook remains uncertain and weak. Also, I find management FY24 guidance too aggressive, adding more risk to the stock given it is heavily dependent on a 2H24 recovery (which is at the mercy of where the macroeconomy moves towards—in other words, a wild card).
Review
SEE 4Q23 headline results were sales of ~$1.38 billion, adj. EBITDA of $274 million (19.9% margin), and EPS of $0.88. Within the food segment, sales were $893 million (2.1% growth), and adjusted EBITDA saw $194.9 million (a 21.8% margin). As for the Protective segment, sales were $485 million (-8.9% growth), which resulted in bad adj EBITDA performance of -11.6% growth, resulting in $91 million adj EBITDA (18.7% margin).
Just as I expected, the 2H23 performance was not going to be spectacular. I believe the current outlook still appears mixed, as the business continues to face headwinds and challenges that need to be resolved before investors will turn bullish on the stock. Starting with the food segment, 4Q23 operating results were not great at all. Volume/mix deteriorated to -3.3% from -0.8% in 3Q23 and -3.2% in 4Q22, and the same softness was seen in pricing as well, only contributing 0.7% vs. 0.9% in 3Q23 and 7.4% in 4Q22. Based on the current macro situation, I expect this weakness to persist throughout at least 1H24 (until there are actual rate cuts that could improve the overall health of the economy). To put it in simpler words, I think that customers are going to continue cutting back on capital expenditures in a weak demand environment, which is going to weigh on the outlook for SEE’s equipment sales in 2024. I also think that the pricing impact will start to flip negative as SEE runs through the benefit it saw from an increase in raw material prices, putting more pressure on topline growth.
As for the Protective segment, while I believe it is likely to benefit from cyclical stabilization, I note there are also structural issues. The near-term cycle benefit is that SEE should be nearing the end of the de-stocking activity and weak industrial demand which had a major impact on the segment’s volume performance (volume/mix down 14% in 2023). This -14% volume/mix performance is on top of the -11.1% saw in FY22, cumulatively pointing to ~-25% of volume. Looking at SEE”s historically performance, there were never years that it saw such huge drawdown. As such, I believe a turnaround might be near. On the other hand, the segment faces more competition from the e-commerce market, where online stores are switching to paper packaging instead of plastic. This is a very negative narrative that I think is going to take some time for SEE to work its way out given it has been late to roll out its paper packaging product. Plastic packaging is also under price pressure as the market has fragmented. As such, until SEE ramps up adoption for its paper packaging product, pricing pressure + plastic volume decline are likely to depress near-term performance.
Pricing pressures have intensified as competitors step up to address weak market demand. On a positive note, the destocking of downstream inventories is largely complete. 4Q23 call
Another near-term risk that I see for the stock is that management guidance is embedding quite a bit of optimism for a strong 2H24 recovery. Management guided for 1Q24 EBITDA of $240 million, implying ~10% y/y decline, and they expect EBITDA to increase sequentially each quarter and to be up y/y in 2H24. This really puts a lot of pressure on 2H24, and with a pretty uncertain macro outlook, it just increases expectations and risks. On a full-year basis, management is guiding for an EBITDA range of $1.05 to $1.15 billion, and if we assume 2Q24 EBITDA to trend at a similar level as 1Q24 given the poor near-term demand outlook, this implies 2H24 EBITDA growth of 11% to meet the midpoint of the FY24 EBITAD guide. This just seems like a really tough hurdle to meet given that SEE has never grown total EBITDA past 10% (on an annual basis). Moreover, FY24 is arguably a much tougher macroenvironment than the past few years.
As such, my updated view is still a hold rating, as there is still no visible catalyst that would drive the stock up. There are some early indicators to be happy out—the end of destocking activity—but broadly, demand is still uncertain..
Valuation
Author’s work
Even if I were to give management the benefit of doubt that they can hit guidance, achieving $1.1 billion in EBITDA in FY24, I still think the market is unlikely to rerate the stock upwards because of all the headwinds I mentioned above. As such, I expect the stock to continue trading at a depressed multiple in the near term. Frankly, I believe this guide has set up things to be very negative for SEE. With this guide, they are expected to hit it (since they guided for it), but it does not help to address the concern at the bigger picture (plastic product demand headwind, playing catch up on pricing, macro situation impacting food equipment sales). If they don’t meet guidance, it deals a big hit to management’s creditability.
All in all, I think the situation is still quite risky to invest in SEE, and investors should continue to wait on the sidelines for now.
Final thoughts
My recommendation is hold rating. The overall demand outlook remains uncertain, and management’s FY24 guidance appears overly optimistic, relying heavily on a second-half recovery tied to a volatile macro environment. While the Protective segment might see cyclical benefits soon, structural challenges like e-commerce competition and plastic packaging pressure persist. Additionally, the Food segment faces weak volumes and pricing headwinds. Until these concerns are addressed and a clear growth catalyst emerges, staying on the sidelines with SEE seems like the more prudent move.
