Sealed Air Earnings: Declining Volumes Persist Amid Normalizing Packaging Demand; Shares Look Cheap

Narrow-moat-rated Sealed Air SEE reported second-quarter earnings that were slightly below our expectations. The company continues to navigate a challenging operating environment as persistent weakness in its protective business weighs on consolidated results. Net sales fell roughly 3% year over year, largely driven by a double-digit pullback in the protective business amid normalizing demand and inventory destocking in the quarter. While Sealed Air’s food packaging business continues to perform well, the company faces a difficult second half of the year amid softening end market demand. As such, we’ve decreased our fair value estimate to $54 from $55 per share due to reduced near-term revenue and profitability in our forecast.

Sealed Air’s food segment continued to perform well, as sales increased over 9% year over year due to higher selling prices and the benefit of the Liquibox acquisition, which offset a slowdown in retail demand. Additionally, food automation sales were up 40% year over year as Sealed Air won business with major protein producers. Despite moderating near-term demand for higher-priced foods like red meat, we think strong demand for equipment and automation should provide a tailwind for long-term growth. The protective segment fared worse in the quarter, with revenue falling 18% year over year and volumes declining almost 20%. Management noted that destocking trends were met with lower end market demand in the quarter and expects both will likely persist through the end of the year.

After an underwhelming second quarter, management lowered full-year 2023 guidance, now expecting adjusted earnings per share of $2.85 (midpoint) from $3.65 (midpoint) previously. While this is a significant decrease, it is not unexpected given the persistent weakness in the company’s protective business. We think management’s new guidance is attainable as relative strength in the food business should help alleviate declines in protective through the end of the year.