Landon Capital

Sealed Air (NYSE:SEE) has received its second upgrade this week as analysts view the underperformance in the share price as having gone too far.

Today, Baird analysts lifted their rating on the stock to Outperform from Neutral, while maintaining a $49 price target. Earlier in the week, BofA Securities analysts upgraded Sealed Air to Buy from Neutral with a $52 price target, saying the valuation at 57% relative multiple is “too low to ignore”.

“Following substantial underperformance in the shares over the past 15 months, our view is that a lowering of 2023 earnings expectations is already the baseline assumption on the Street – noting also that irrespective of a tough 2Q earnings report, volume optics will improve substantially 3Q onward, with $4 earnings power for Sealed Air still realistic,” Baird analysts commented in their report.

In today’s report, the Baird analysts highlight the massive 45% underperformance in the stock since late Q1 of 2022 has been driven in part by various challenges, including significant volume declines in the economically sensitive Protective Packaging segment (down by approximately 15% to 20%) and volume declines in the otherwise resilient Food Packaging segment (down by approximately 10% to 15%). Additionally, there is elevated balance sheet leverage, with a debt-to-EBITDA ratio in the range of 3 to 4 times. The company also had to make a significant tax payment of $175 million, which impacted its free cash flow optics for 2023 (with a base of $500M). Moreover, there are growing concerns about downward revisions to estimates specifically for the year 2023.

The analysts add that while 2023 guidance will likely be lowered, they believe this is “fully reflected in the 21% decline in the shares YTD noting also that base comparisons for both operating segments are likely to benefit from improved optics 3Q onward.”

Despite investor fatigue and a complex mix of cost-cutting measures and anticipated volume growth, the Baird analysts highlight that Sealed Air holds strong franchises with deep moats. Notably, the company’s earnings power stands at $4 per share, irrespective of the anticipated 2023 guidance.