Executives at Sealed Air (NYSE:SEE) are probably popping the pockets of air in their Bubble Wrap packaging, pondering the impact lower economic production will have on their business. With profits tumbling 41% in the quarter, the deflated prospects for the rest of the year are weighing heavily on their shoulders. They might want to consider wrapping their operations in some Bubble Wrap.
United Parcel Service (NYSE:UPS) was recently taken to task by analysts for not revising guidance to reflect deteriorating circumstances, even as FedEx (NYSE:FDX) braces for a hard landing. Chairman and Chief Executive Fred Smith recently said the shipper is facing "some of the worst economic conditions" in the company's 35-year operating history.
That's partially due to customers choosing lower-priced shipping options, rather than higher-cost express services. But shipping volumes also fell hard in the second quarter, with overnight box shipments falling 7% from a year ago, while overnight envelopes were down 10% over the same period. Even with DHL exiting from the U.S. market, things are not improving.
To add to the misery, truckers like YRC Worldwide (NASDAQ:YRCW) and railroads are seeing sluggish results from the slowing economy. Expect packaging companies like 3M (NYSE:MMM) to share in the misery.
But protective packaging remains just one part of Sealed Air's business. Food packaging remains the largest segment, but a challenging environment in Europe had investors asking, "Where's the beef?" While Brazil consumes 80% of the beef it produces, it remains the world's largest exporter, controlling 32% of the global market. Despite more Brazilian processors being approved to export beef to Europe, a sagging economy has dampened desire for red meat. The food solutions segment would have seen a 2% increase in sales had it not been for the effects of foreign currency exchange rates. As it was, revenues dropped 5% in the quarter.
That presents a problem for Sealed Air in the coming year. Treasury Secretary Tim Geithner has said a strong dollar is in the nation's interest, suggesting the Obama administration will pursue policies to maintain that strength if not improve on it. But Sealed Air says that such a monetary policy is likely to cost it anywhere from $300 million to $400 million in revenue. It's forecasting earnings of $1.25 to $1.45, below the consensus view of $1.46 per share by analysts.
With food packaging turning rancid from an economic malaise overseas and protective packaging bursting closer to home, look for Sealed Air to engage in more therapeutic bubble popping to ease the strain of a painful recession.
