Sealed Air Corporation (NYSE:SEE): Are forecasts sustainable?

With analysts expecting Sealed Air Corporation (NYSE:SEE) to record a contraction in earnings of -9.74% in the coming 12 months, it’s important to take a step back and think through this damaging sentiment. It is crucial for investors to do this, so they can judge the underlying components responsible for sparking this decline, as there are certain implications that can impact on shareholder return. To help investors get a top level understanding, I will shine a light on the behaviour of Sealed Air’s margins so investors can evaluate the revenue and cost drivers behind future earnings projections and understand how they may impact on returns compared to the industry.

Breaking Down SEE’s Profit Margin

Attractive margins generally indicate a desirable ability to translate sales revenue in to earnings, and return for shareholders. By calculating SEE’s profit margin, we can take a closer look at this ability and use it to understand what is driving earnings growth.

Margin Calculation for SEE

Profit Margin = Net Income ÷ Revenue

∴ Profit Margin = 376.60 Million ÷ 6.90 Billion = 5.46%

There has been an expansion in Sealed Air’s margin over the past five years, with a 25.33% average growth in net income surpassing a 2.76% average growth in revenue, indicating that that the previous revenue growth has been acompanied by a growing portion translated in to earnings. SEE’s most recent margin of 5.46% appears to follow this trend, which suggests that the increase in net income has likely occurred from a combination of enhanced cost efficiency as well as top line growth.

Using Sealed Air’s margin expectations as a way to understand projections for the future

Margins are expected to continue to expand, with 2.25% in expected annual revenue growth and annual net income growth forecasted at 31.54%. This suggests future earnings growth is driven further by enhanced cost efficiency alongside revenue increases, which is enlarging the incremental amount of net income that is retained from the forecasted revenue growth. Despite this, those watching the stock must know a expanding margin can mean different things for different companies, thus more detailed research is essential.

NYSE:SEE Future Profit Dec 29th 17
NYSE:SEE Future Profit Dec 29th 17
Profit margins are commonly useful when employed as a comparitive measure to judge a business’ profit-making ability against its industry. For Sealed Air in particular, future profit margin is expected to expand along with the Packaging industry margins, whilst at the same time, SEE’s forecasted ROE of 141.09% exceeds that of the expected 14.88% ROE of the industry (note that this observation is also influenced by relative debt levels). This suggests that analysts expect Sealed Air’s return per dollar of equity will exceed the industry due to the earnings attributes identified in our margin analysis. However, margins use items on the income statement that are prone to being manipulated by various accounting measures, which can distort our analysis. Thus, it is essential to run your own analysis on Sealed Air’s future earnings whilst maintaining a watchful eye over the sustainability of their cost management methods and the runway for top line growth.

Next Steps:

For SEE, I’ve compiled three pertinent aspects you should further examine:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

2. Valuation: What is SEE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SEE is currently mispriced by the market.

3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of SEE? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!