Sealed Air Earnings: Firm Wraps up Quarter With Underwhelming Results, but Shares Remain Attractive

Sealed Air SEE reported underwhelming first-quarter results as higher selling prices and contributions from the Liquibox acquisition weren’t enough to offset an almost double-digit decline in volume. Sales decreased 5% year over year, mainly from weakness in the company’s protective business, despite strength in the food segment. Management reaffirmed its full year adjusted EPS guidance of $3.65 (midpoint) on the expectation of strong performance in the second half of the year. While this seems achievable to us, the company still faces near-term headwinds that could weigh on results. We’ve decreased our fair value estimate to $55 from $57 per share due to reduced near-term profitability in our forecast.

The company’s food segment posted solid results, with sales increasing 5.5% year over year despite a 3% decline in volume. The segment faced pressure during the quarter as consumers tightened spending, trading down when shopping. This had the biggest effect on red meat, the segment’s largest end market, as consumers shifted to less expensive cuts of meat amid inflationary and recessionary concerns. Nevertheless, Sealed Air continues to make progress with its automation solutions and equipment. That said, Sealed Air faces near-term challenges as customers slow capital expenditures due to recessionary concerns, which could weigh on automation and equipment growth through the year.

The packaging segment fared worse in the quarter as sales declined almost 19% year over year, largely due to continued destocking and weakness in industrial. Destocking has weighed on the packaging industry over the past few quarters, with Sealed Air unable to buck the trend. Additionally, the segment reported a 16.2% adjusted EBITDA margin, a roughly 450-basis-point decline from a year ago as lower volumes led to unfavorable operating leverage. While we expect some destocking trends to persist through the second quarter, we anticipate a destocking slowdown in the second half of the year.