Sealed Air Corp Gets An Upgrade From Citi

Citi has upgraded Sealed Air Corp SEE to Buy from Neutral on the recent pullback in shares as investors disappointed over the lack of full-year guidance raise, coupled with concerns on emerging markets and Brexit.

For the first quarter, Brazil volumes fell 8.5 percent and the company gets 34 percent of sales from EMEA.

“We think the concerns are overdone and are positive heading into 2Q,” analyst Anthony Pettinari wrote in a note.

Bad News, Bears?

The analyst expects the company to benefit in the second half from easier organic sales comps, "with earnings growth driven by increased momentum in the US beef cycle, continued growth in e-commerce sales and customer wins in Diversey." Notably, Sealed Air booked +10 percent machinery growth in the first quarter, which typically is a leading indicator of future sales.

Related Link: Goldman Sachs: 27% Upside In Sealed Air Despite Buyside Pushback

With the stock down 8 percent since the first quarter earnings, Pettinari said sentiment is too negative heading into the second quarter. The analyst compared the current scenario to second half of 2015, when the company cut its full-year free cash flow guidance and the stock sank 18 percent, before recovering to near all-time highs as original targets were ultimately hit.

“We think a light 2Q (Citi est. $292 million EBITDA) is priced in & expect the stock to move higher on reiteration of FY guidance & 2018 FCF targets,” Pettinari highlighted.

Adjustments Looking Forward

The analyst, who hiked its price target on the stock by $2 to $56, projects FCF increasing +15 percent CAGR from 2016–18 as capex winds down and earnings growth continues.

“With SEE within their target leverage range (3.5x–4.0x) we expect excess cash to go to buybacks, we model +$0.08 net accretion from $700 million in buybacks in 2017; notably’16 guidance assumes no repurchases,” Pettinari added.

Pettinari expects EPS of $2.58 for 2016, while raising 2017 EPS view to $3.10 from $3.05. Street expects EPS of $$2.59 for 2016 and $3 for 2017.

Shares of Sealed Air closed Thursday’s regular trading session at $48.33, and at time of writing, the stock was up 1.43 percent on Friday, trading at $49.02. The new target price of $56 implies a potential return of 15.9 percent.