Is this an Air-Tight Investment?

Barclays recently downgraded Sealed Air (NYSE: SEE  ) to Neutral from Buy, citing input costs and rich valuation. Barclays' target price has been moved from $35 to $30 over the next twelve months. On the other hand, and what's often not reported in the headlines, is that Barclays is positive on Sealed Air over the long haul because of gradually improving margins and pricing. Since this call can seem a little confusing, let's take a look at Sealed Air from a logical perspective to see if it's likely to offer a quality long-term investment opportunity. And if that's not the case, whether or not Bemis Company (NYSE: BMS  ) or Sonoco Products (NYSE: SON  )  presents a better option.

Around the world in 80 seconds
In the second quarter, Sealed Air's net sales increased 1.9% year over year. Below is a quick look at how Sealed Air is performing around the world, followed by why.

 

% of Sales

Net Sales (y-o-y)

North America

39.6%

Up 2.1%

Europe

31.7%

Down 1.5%

Latin America

10.6%

Up 7.6%

Asia, Middle East, Africa, Turkey

11.4%

Up 9.4%

Japan, Australia, New Zealand

6.7%

Down 3%

North America has performed moderately well thanks to increased sales to new and existing customers.

Latin America delivered a stronger performance, primarily due to high demand for fresh red meat which increased demand for Sealed Air's shrink bags and equipment products.

The next geographical breakdown is a little trickier. If you only look at the 9.4% year-over-year improvement in the Asia, Middle East, Africa, Turkey geographical segment, then you would logically assume that all is well in all these areas, but that's not the case. While the overall picture is good, Egypt and Turkey have lagged due to political and civil unrest. However, other areas picked up the slack thanks to increased sales of fresh dairy packaging products and higher growth in beverages and brewing.

Europe remains a thorn in Sealed Air's side, as is the case for so many other companies throughout various industries. This is simply due to an austere economic environment and reduced consumer confidence.

The Japan, Australia, and New Zealand geographical segment might not be as important as the others, but it still matters. And the decline isn't overly concerning since it's partially due to a temporary event -- a drought in New Zealand, which impacts the dairy market.

Striving to improve
Sealed Air is constantly trying to cut costs in order to improve the bottom line. Considering the company's inconsistency on the bottom line, this makes sense. In the second quarter, Sealed Air saved $20 million as part of its Integration Optimization Program. Steps taken included:

  • Reduced headcount
  • Plant consolidations
  • Procurement and logistics savings

Looking ahead, Sealed Air expects cost savings between $195 and $200 million by the end of 2014 from its Integration Optimization Program. This is on top of a restructuring program that is expected to save $85 million annually by 2015.

Sealed Air is focused on price hikes in order to make up for rising input costs, but it's uncertain how this will affect demand.

Sealed Air vs. peers
The good news is that Sealed Air has had no problem growing on the top line recently, which can be attributed to organic and inorganic growth:

BMS Revenue TTM Chart

BMS Revenue TTM data by YCharts

However, that growth has come at a steep cost:

SEE EPS Diluted TTM Chart

SEE EPS Diluted TTM data by YCharts

Not many savvy investors want to invest in a company that's inconsistent on the bottom line. On the other hand, growth investors might take a look at Sealed Air. Regardless of where you fit in, consider key metric comparisons for these three companies:

 

Forward P/E

Net Margin

ROE

Dividend Yield

Debt-to-Equity Ratio

Sealed Air

18

(17.31%)

(71.88%)

1.90%

3.34

Bemis Company

15

3.74%

11.99%

2.60%

0.94

Sonoco Products

15

4.29%

13.65%

3.20%

0.71

Sealed Air is the weakest in every area. It has the richest valuation, it lags its peers when it comes to turning revenue and investor dollars into profit, and it offers the lowest yield while also sporting the highest debt-to-equity ratio. The latter is rarely seen, and it's concerning. The interest on the company's debt has the potential to impede growth potential and affect how much capital the company returns to shareholders down the road. While it's possible for Sealed Air to improve its balance sheet and for all to be well, Foolish investors prefer proven, stable, and fundamentally sound companies. This would point to Bemis Company or Sonoco Products, with Sonoco Products being the most impressive.

Bemis Company and Sonoco Products are both trading at fair valuations, and they're both good at turning revenue and investor dollars into profit. Furthermore, both companies offer generous yields, with Bemis Company yielding 2.60% and Sonoco Products yielding 3.20%. Consider the strong debt management displayed by both companies, these yields should remain intact. 

Kiss her goodbye ... for now
If Sealed Air gets its financial house in order and improves on the bottom line via cost-cutting measures, then it will present a great investment opportunity. However, that can be said for many companies in similar situations. Most of the time, this is a steep challenge for a company, because it's very difficult to cut costs and grow the top line at the same time. It's better to stick with companies that don't have to contend with such headwinds. 

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