News Analysis date published New: 
Friday, August 31, 2012 - 10:30
New Date created: 
Friday, August 31, 2012 - 10:30
New Date last updated: 
Friday, August 31, 2012 - 10:30

This Blue Chip Stock Could Rebound by 40%

Friday, August 31, 2012 - 10:30am

Jerome Peribere had a short honeymoon with investors -- one day to be exact. When news broke on Wednesday, Aug. 29, that he would become president of Sealed Air (NYSE: SEE), investors cheered him with a quick 12% gain in the company's stock. A day later, the stock was already pulling back.

Peribere brings serious chops to this struggling packaging giant: He oversaw a $12 billion division of Dow Chemical (NYSE: DOW). And you can bet he has some strong ideas about how to fix the mess his predecessor at Sealed Air created.

Former President William Hickey (who will stay on a few more quarters as CEO and chairman before retiring) oversaw a botched acquisition that has left shares in the doghouse.

The solid gain for this stock likely had more to do with his departure than Peribere's arrival. Though in a moment, I'll explain why Peribere's arrival is a lot more significant than it may seem, and there may be a chance for investors to profit.

Fixing what's not broken
Hickey had been running a fairly sleepy and unsexy business with roots dating back to 1960. The company is a global leader in food packaging, with brands that include Bubble Wrap, Cryovac, Instapak and others. You can find these products in almost any business' shipping department, and increasingly, in the butcher's section of your supermarket.

Business hummed along every year, with sales growing 4-8% each year from 2004 to 2008. Even after an economy-related setback in 2009, sales rebounded 6% in 2010 to $4.49 billion. But that was still below the peak sales of $4.84 billion reached in 2008, which likely made Hickey anxious to find new paths to growth.

In June 2011, Sealed Air moved to acquire Diversey for $4.3 billion in cash and stock. Diversey was the second-leading provider (behind Ecolab (NYSE: ECL)) of cleaning and sanitation services and equipment. If you are wondering what that business has in common with packaging, you're not alone. Investors could see little logic to the deal -- and many still don't.

When the deal was announced, Hickey promised to deliver a wide range of cost cuts. He also intended to find ways to cross-sell Sealed Air's products to Diversey's customers, and vice-versa. Those goals have been slow to materialize, adding insult to an already unappealing acquisition.

Peribere's Task Ahead
The good news: Sealed Air isn't broken, just in need of some deep tinkering. In many respects, Peribere looks like the man for the job. In his role at Dow Chemical, Peribere was partially responsible for the company's cleaning and solvents business, which makes it a direct competitor of Diversey. In short order, look for Peribere to institute ways Diversey can mimic the best practices deployed by Dow Chemical.

Peribere also has a history of focusing on developing new products that customers will pay a premium for. So look for discussions on the ways in which Sealed Air can step up its product development efforts.

But even before his arrival, Sealed Air was already taking steps to boost profits. It has outlined $90 million in 2012 cost cuts and another $95 million in 2013. That should set the stage for a return to more than $300 million in annual free cash flow (which is where it stood in 2009 and 2010 before falling to $180 million in 2011). To make things better, Merrill Lynch's Staphos foresees free cash flow exceeding $500 million by 2014.

You always want to see management's interests aligned with shareholders. It's notable that much of the new CEO's compensation is tied to the stock price. The higher it rises, the more he'll hit his milestones. He won't simply benefit from a rising stock market. Sealed Air's stock must outperform a group of rivals selected by its board, which is a mix of chemical companies (Agrium (NYSE: AGU)), Celanese (NYSE: CE) and Huntsmand (NYSE: HUN) among others) and packaging companies, (including Avery Dennison (NYSE: AVY), Ball Corp. (NYSE: BLL) and MeadWestvaco (NYSE: MWV)). The ability to score a big payday might explain why Peribere is giving up a 35-year long career at Dow Chemical for this more challenging gig.

Risks to Consider: This is an economically sensitive business, and more than half of sales are derived abroad. Even as management works to streamline operations, sales gains may be muted in the near-term.

Also, PerIbere will need to figure out how to boost Diversey's margins, or construct a plan to unload the business, as it's dragging down company-wide margins.

Action to Take --> Peribere knows he's getting in while shares are trading cheap. The stock's steady drop means it trades for less than eight times projected 2013 profits. Shares also trade for less than five times projected 2013 EBITDA. In effect, this is shaping into a low-risk, high-reward turnaround play. If Peribere does nothing more than cut costs, then shares are likely to hover at current depressed levels. But if he can reinvigorate growth and boost margins, then analysts will soon be speaking of expanded price-to-earnings (P/E) multiples, and this stock could move back into the $20s, where it was in the spring of 2011, which is about 40% above current levels.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

The StreetAuthority Insider is a subscriber-only, complimentary publication, exclusively for our paid customers. As a paid subscriber in good standing, you'll now be getting more exclusive access to more investing gurus than ever before. I hope you'll find these periodic missives always informative, occasionally entertaining and consistently helpful to your bottom line.