Don’t call them value traps

I saw this news today:

Sealed Air’s (SEE:US) President and CEO steps down, effective immediately.

Sealed Air Corporation is a packaging company known for its brands such as Cryovac food packaging and Bubble Wrap cushioning packaging.

It’s a stunning announcement and often a change of CEO is a good catalyst for the stock price, but I was prompted to take a quick glance at financials…and I started typing out some notes.

Market Cap is $4.1 billion

Net Debt is $4.8 billion is more than its market cap, nearly as much as its annual revenue and 5.5 times more than its EBIT of $873 million.

The Interest Expense of $230 million (on that $4.8bn debt) equals 26% of its EBIT and 4% of its revenues

If you write-off or omit the $2.2 billion of goodwill held on the balance sheet, Net Assets are negative $2 billion.

Its inventories (which have doubled over the past 4 years) now equate to 18% of its revenue.

And that is only a quick glance….

To boot, the stock has fallen from $65 to $28 over the past 18 months and today Wall Street analysts are downgrading the stock. Hmmmm…..too late.

Today, I hear the term ‘value traps’ describing such stock price declines. That’s also too late.

The thing is….when the stock was trading at $60 (its market cap would have been nearly $8 billion) it wouldn’t a value trap….it would’ve simply been expensive.

p.s. it’s trading at the same price as seen in 1998.

The assessment about the company’s stock price to be done much earlier, under various ‘what-if” scenarios.

What if the cost of interest doubles?

What if we don’t sell and move our inventory?

What if we don’t receive 100 cents in the dollar for our $730 million in receivables?

While today, Sealed Air’s debt equals 100% of its market cap (I may discuss EV/EBITDA another day), there are other companies today whose debt equals 50% of their market cap.

What if………?

At some stage, this stock could be a really compelling to own but in a world full of other opportunities coupled with 5% risk free rates, do I need to be there especially when conviction is more paramount and in recent memory…..

but then, perhaps owning the debt is better than the equity.

October 24, 2023

by Rob Zdravevski

rob@karriasset.com.au