When the market is turbulent, investors often embark on a flight to safety. That means investors will pile into risk-off assets, such as Treasuries, gold and consumer staples. Indeed, this is exactly what has happened over the last month. While the S&P 500 is off more than 2% in the last month, the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) is up 9%, and the SPDR Gold Shares (NYSEARCA:GLD) is up 5%. And since Aug. 5, the Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP) has gained 5%.
Given that backdrop, one would assume a food and product packaging company like Sealed Air (NYSE:SEE) would also have benefited from this August flight to safety. It did, for awhile. At one point in early August, SEE stock price was up nearly 10% in August. But the stock has since given up most of those gains, and now SEE stock price is more than 5% off its August highs, while TLT, GLD, and XLP are all at or right next to their August highs.
In other words, while SEE stock was initially thought of as a great risk-off investment in this stumbling economy and turbulent market, investors have since second-guessed the relative safety of Sealed Air stock.
I totally get it. Ostensibly, SEE stock seems very stable, with a fairly attractive valuation and a steady yield. But at this point, it has optical issues which may keep SEE stock price relatively muted for the foreseeable future.
As a result, I think Sealed Air stock is best left alone for now. Its fundamentals are strong enough that it’s not a great short. Its optics are troubling enough that it’s not a great long. In such a situation, the sidelines are the best place to hangout.
Sealed Air’s Fundamentals Are Pretty Good
The fundamentals supporting SEE stock price are pretty good, and they’re mostly favorable to the bull thesis.
SEE is a global food and packaging company. Its business is pretty stable. No matter what the global economy is doing, the world is still going to have to transport staple food and goods. It’s true that, as global economic activity slows, so will the trading of these goods. But the slowdown will be gradual, and it won’t be that steep.
Consequently, Sealed Air’s performance over the past several years – a low-to-mid-single=digit-percentage revenue grower, excluding acquisitions, with slight margin expansion and low-to-high-single-digit-percentage EBITDA growth – will probably be largely duplicated over the next several years. Its growth will likely slow a bit as the global economy weakens. But Sealed Air should be able to grow its revenues at a low-single-digit rate over the next several years, on largely stable margins, which – when coupled with its buybacks of SEE stock – should produce high- single-digit-earnings per share growth.
Sealed Air’s EPS can reach somewhere around $4.80 by fiscal 2025. Based on a forward price-earnings multiple of 17, which is average for the packaged-goods sector, that implies a fiscal 2024 price target for SEE stock of over $80. Discounted back by 10% per year, that equates to a 2019 price target of about $50.
SEE stock price is slightly above $40 today. Thus, the long term growth fundamentals currently say that Sealed Air stock is undervalued.
The Optics Give Pause
Although SEE stock is undervalued, the optics surrounding Sealed Air warrant this undervaluation for the time being. Specifically, there is an active SEC investigation overhanging Sealed Air which has created a lot of distractions. These distractions detract from Sealed Air’s value as a risk-off investment during turbulent times.
This SEC investigation has shifted into another gear in 2019. In May, Sealed Air was served a subpoena relating to a previously disclosed SEC investigation into the company’s accounting practices. That additional subpoena has had an avalanche impact on the company.
A month later, Sealed Air fired its CFO. Three months later, the company received a grand jury subpoena from a U.S. Attorney for documents related to the firing. A week after that, Sealed Air switched audit firms. And, a week after that, Upslope Capital Management, which was shorting Sealed Air stock, issued a report, citing the SEC investigation and accounting irregularities as two big reasons why it believed that SEE stock would head lower.
Against the backdrop of all those distractions, Sealed Air’s organic revenue growth has slowed to a multi-year low in 2019.
In other words, SEE stock price is being weighed down by slowing growth trends against the backdrop of a ton of SEC/accounting noise that doesn’t give investors confidence. Slowing growth plus a lack of confidence is not a winning combination.
So despite SEE’s favorable fundamentals, SEE stock price likely won’t march meaningfully higher anytime soon.
The Bottom Line on SEE Stock
It’s easy to look at SEE stock and see a stable consumer staples stock that should theoretically outperform during turbulent times. But that cursory analysis ignores the ugly optical risks overhanging the company. Those unfavorable optics will ultimately put a cap on near-term gains by SEE stock, making it unattractive for now.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.