Mental image: $900 million worth of bubble wrap. Can't do it, can you? In fact, I'll bet most people never really considered that bubble wrap costs anything.
Well, it does, and Sealed Air
Sealed Air's $908 million in revenues shatters its record of $865 million set last quarter and is a full 11% higher than last year's $825 million. While the quarter was a smashing success, yesterday's results did come with the help of a substantial tailwind in the form of currency translations to the tune of nearly $40 million. Earnings for the quarter were $0.45, compared with $0.70 a year ago.
That's right, earnings are lower. Does this mean that the company's costs spiraled out of control? Did CEO Bill Hickey suddenly shirk his well-earned reputation for thrift and conservatism and buy every employee a BMW? Did the company's heretofore "inconsequential" exposure to asbestos litigation suddenly become quite consequential? Hardly. Sealed Air's financial statements highlight the danger of just looking at one number.
In July, Sealed Air decided to finance the redemption of all of its Series A preferred class of stock at about $51 per share. The reasons for doing so are myriad but, generally speaking, companies decide to redeem preferred shares (which are equity but have many of the same characteristics as debt, including regular coupon payments) when it is advantageous for them to do so. In this case, Sealed Air saw a chance to replace high-cost preferred with lower-cost debt. And since interest payments are reflected on the income statement while dividend payments show up only on the cash flow statement, current results look worse, though they are better.
If you want a real fright, take a peek at what the long-term debt account does -- increasing from $860 million to more than $2.4 billion. It's all part of the same thing: improving the company's overall economic position regardless of its effects on current results. In fact, I'm somewhat surprised that more companies don't employ preferred stock for its ability to make earnings seem higher. Sealed Air, long one of Berkshire Hathaway
The company's excellent results came in spite of a generally depressed economic state. Management expressed some hope that the more recent upturn would continue. Whether it does or not, I'd look for Sealed Air to continue to shine. In the conference call, which we access courtesy of CCBN, management noted that in particular the furniture market, which ships products in the billions of dollars each year, has remained quite soft.
So, for Sealed Air to turn in the quarter it did, even with the currency translation effect, is really quite exceptional.
Bill Mann owns shares of Berkshire Hathaway. How'd Warren Buffett find Sealed Air? By looking where no one else did. Consider a 30-day free trial to our monthly Hidden Gems newsletter, where Tom Gardner uncovers stocks off Wall Street's radar.
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