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Morningstar | Sealed Air Underwhelms on Volume Growth, but 2018 Outlook Is Unchanged. See Updated Analyst Note from 02 Aug 2018

Sealed Air's second quarter was decent, with organic sales up nearly 6% versus the prior year, and adjusted EBITDA up 11% over the same period. The company also announced the acquisition of AFP, a private packaging company that produces packaging made from a wide variety of substrates in the U.S., Mexico, and Asia. The company disclosed neither profitability nor the purchase price of the business, leaving us somewhat concerned that management overpaid. Although our financial forecasts remain unchanged, our fair value estimate rises to $47 per share from $46 because of time value of money effects. Our narrow-moat rating is unchanged.

In product care, organic sales rose roughly 5% versus the prior year, primarily driven by improving price and mix. We were disappointed to see volume rise less than 1%, something management blames on some cannibalization of old packaging solutions by new options. Adjusted EBITDA margins stayed flat at 17.8%, with efficiency gains and higher pricing offsetting rising input costs. Over time, we expect volume growth to re-accelerate as flexible mailers gain share from boxes in an effort to reduce total delivered cost.

Food care delivered balance growth of both price/mix and volume, at 2% and 3%, respectively. Despite top-line gains, adjusted EBITDA margins came down slightly to 19% from 19.4% during the prior year, mainly because of increased freight and input costs. Given that many of Sealed Air's products aren't strictly priced using pass-throughs, a high level of equipment integration with food packers should allow Sealed Air to gradually increase price to recover higher costs, albeit over the coming year or two.

We believe Sealed Air's moves to better diversify its packaging offerings is a wise strategic move. In June, the company announced an agreement to work with Kuraray America to increase the number of products that use bio-based resins, derived from corn rather than oil, which are biodegradable. The purchase of AFP also provides corrugated, molded pulp, and wood packaging options for customers. Given the increasing attention paid by major packaging buyers to ecological concerns, we think a broader product portfolio that could offset reduced oil-based plastic consumption will help position Sealed Air for the long run. However, limited disclosure around purchase prices and agreement terms leaves us cautious. While we've made no adverse model adjustments to account for this, we highlight that these strategic choices could have a negative impact on the value of the firm if they aren't done at the right price.