Analysts at UBS have downgraded Sealed Air Corporation (NYSE:SEE) on their thesis that the food safety and security and product protection solutions provider’s return to growth will take longer to play out than they originally had forecast.
They downgraded their rating on the stock from ‘Buy’ to ‘Neutral’ and lowered their price target from US$54 to US$44.
Sealed Air shares traded hands at $37.65 at noon on Monday.
In a note to clients, the analysts cited market headwinds, such as the forecast drop in United States red meat production, and declining backlogs as factors that could limit Sealed Air’s sales growth recovery.
“Automation strength had been a key tenet of our prior thesis, but SEE’s backlog is now declining as customers reduce capex spend, and reduced secondary packaging is negatively impacting Protective volumes,” they wrote.
“We also see risks that SEE’s food business could have margin pressure from contractual price pass throughs over the next year.”
The analysts said they now forecast that Sealed Air’s volumes would decline by 7% in 2023, after falling 6% in 2022, and they now expected about a 2.5% volume recovery in 2024.
“Lower fresh and processed meat demand (about 55% of Food revenue, 32% of total company) creates a volume headwind for SEE in 2023 and 2024,” they wrote.
They noted protective volumes were down about 20% to 25% on a two-year stack, with visibility in improvements low.
“Protective volumes face further destocking at industrial customers (about 30% of segment sales), which we expect should recover somewhat in 2024,” they wrote.
“However, we're less certain about the recovery potential in the rest of the business with declining new install backlogs, and increasing inter-material competition (i.e., paper void fill, or reduced secondary protection).”
The analysts highlighted that the company was taking cost savings actions, which should yield $100 million in savings next year but could mostly be offset by a year-over-year reset in variable comparisons.
“While we believe 2023 estimates are largely de-risked, we believe the stock will remain range-bound until we have visibility to a stronger recovery in mid-to-late 2024,” they wrote.
“Price pass through and further givebacks could also make it tougher to pass on inflationary cost increases.”
They concluded that a stronger recovery could prove an upside compared to their estimates for the stock, but with a lower growth outlook for 2024 and 2025 compared to their prior expectations the analysts concluded: “We see it harder for shares to re-rate.”
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