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Sealed Air (NYSE:SEE) shares rose more than 2% today after UBS upgraded the company to Buy from Neutral with a price target of $59.00, noting that volumes should inflect with normalizing customer demand.
Supply chain issues such as those with resin and equipment parts, combined with a post-COVID demand reset and industrial destocking, resulted in negative volume trends over the past year. However, the firm anticipates a positive inflection in volumes beginning in Q3/23. This is expected to boost confidence in the company’s growth algorithm, and UBS models a long-term approximately 13% EPS CAGR, which makes the stock undeserving of the current valuation discount.
The firm expects Sealed Air to shift from -6% year-over-year in H1/23 to +3% in H2/23. In the food segment, which accounts for approximately 65% of PF sales, the company underperformed the market in late 2022. However, UBS expects the company to regain its typical outperformance in H2/23, driven by improved materials/parts supplies and equipment/automation wins. “Protective (~35% of PF sales), has already seen a market correction in e-commerce/shipping, electronics, & Industrial demand (incl. destocking),” added the firm.
UBS thinks the market expects EBITDA to decrease by around 10% compared to 2023 estimates due to a 12% decline in organic EBITDA year-over-year (excluding Liquibox), and minimal growth in 2024.
The company achieved a 6% year-over-year increase in organic EBITDA in 2020 on flattish volumes. Similarly, in 2009, EBITDA grew 8% year-over-year despite a 3-4% decline in Food volumes, indicating counter-cyclicality of earnings and providing defensiveness in a downturn. With the stock now trading at a 10-20% valuation discount (9% FCF yield), UBS views the shares as attractive.
