More Than 36% Undervalued, This Cheap Stock Is a Buy for Contrarians

The out-of-favor stock of this narrow-moat company is due for a rebound.

Spencer Liberman 15 February, 2024 | 4:45AM
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Consumer Cyclical Sector artwork

Among the small companies we cover, Sealed Air SEE is a cheap stock pick. The packaging producer has carved out a narrow economic moat, and its stock looks deeply undervalued. Sealed Air is among Sekera’s four still-cheap stocks to buy as the market hits new highs.

Sealed Air produces a wide variety of flexible resin packaging, protective shipping materials, and integrated packaging systems. The company’s food segment, which accounts for roughly 60% of revenue, produces materials and equipment for food processors. In the food business, packaging materials are held to a higher standard as they need to protect products from damage while limiting spoilage. The importance of effective packaging leads to strong relationships between food processors and the producers that can meet stringent food safety requirements. Sealed Air’s protective segment mainly sells to industrial and e-commerce end markets, where shipping products rapidly and safely is the highest priority.

Key Morningstar Metrics for Sealed Air

Economic Moat Rating

We think Sealed Air benefits from durable competitive advantages that should support economic profits for at least the next 10 years. We assign it a narrow moat rating based on switching costs and intangible assets. Sealed Air supplies its customers with the packaging materials they need to ship their products safely and the equipment that enables packaging products at scale. Packaging is essential for Sealed Air’s customers, as they cannot complete the manufacturing process without it, and Sealed Air’s equipment is usually embedded in their production process. This gives Sealed Air strong pricing power, as many customers would find it time-consuming and costly to overhaul their manufacturing processes. Sealed Air’s intangible assets come from its proprietary equipment and reliability as a partner.

Read more about Sealed Air’s moat rating.

Fair Value Estimate for Sealed Air Stock

Our fair value estimate is $54 per share. We see solid growth and profitability for Sealed Air over our five-year forecast horizon, with consolidated sales growing at a 2.4% compound annual rate and operating margin averaging about 16% (compared with the 10-year average of 13.9%). We expect robust growth in Sealed Air’s food business driven by demand for packaging automation. Growing e-commerce spending and labor optimization efforts should provide a runway for growth in the company’s protective business. Our stage two model assumes Sealed Air can generate a 20% return on new invested capital and 5% earnings before interest growth for 10 years after our five-year explicit forecast period.

Read more about Sealed Air’s fair value estimate.

Risk and Uncertainty

From a fundamental perspective, we view the threat of reputational damage and exposure to economic cycles as the key sources of valuation uncertainty for Sealed Air. The company’s protective segment mainly makes commoditized products for industrial and e-commerce end markets. Sealed Air is forced to compete on price while its end markets are exposed to changes in economic cycles. The food business is less commoditized and cyclical than the protective segment, but the company is exposed to significant reputational risks due to the high-stakes nature of food packaging. If a consumer were to get sick because of faulty packaging from Sealed Air, customers could become concerned about quality and ultimately switch packaging providers.

Read more about Sealed Air’s risk and uncertainty.

Sealed Air Bulls Say

  • As the leader in food packaging and automation, Sealed Air is well positioned to capitalize on growing food demand as the global population increases.
  • Companies will seek out Sealed Air for automated packaging solutions to counter rising labor costs and increase packaging efficiency.
  • As e-commerce becomes the principal form of retail purchasing, Sealed Air will benefit as customers look for all-in-one packaging solutions.

Sealed Air Bears Say

  • Sealed Air’s leading position in food packaging solutions could be threatened as competitors increase investments in automation.
  • Sealed Air’s growth objectives could force the company into unfavorable acquisitions.
  • The protective business produces commoditized products that face constant pricing pressure from competitors.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Sealed Air Corp31.50 USD0.10Rating

About Author

Spencer Liberman  is an equity analyst for Morningstar.

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