When to Ignore the Insiders

 | Nov 29, 2012 | 10:00 AM EST  | Comments
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On Tuesday, Sealed Air (SEE) board member Kenneth Manning bought 5,000 shares of the company's stock at an average price of $17 per share. Sealed Air is a company with $3.3 billion in market capitalization that makes food and protective packaging products (such as bubble wrap). Before this latest share purchase, his last one -- according to our database of 13-F filings -- came in November of 2011 at an average price of $17.44.

Manning had bought other shares that year at even higher prices, so overall he doesn't seem to have a good track record here. On average, stocks bought by insiders tend to outperform the broader market, but this isn't always the case, so we at least like to look quickly at how a particular insider's trades have performed in the past. With his latest purchase, Manning owns just over 100,000 shares of Sealed Air's stock.

In the third quarter, Sealed Air's revenue climbed 53% year over year. However, all of this growth came from the company's October 2011 acquisition of Diversey, a company that makes cleaning and hygiene products. If we leave out the results from that segment, sales were down 4%. Sealed Air also recorded a large impairment to goodwill from the takeout, which drove a large net loss. Without the goodwill impairment, operating income was 10% higher year over year -- but, again, that includes the results from Diversey, so it doesn't necessarily reflect much of an improvement at the company. We'd also note that share count is up close to 10% in the last year. In addition, cash flow from operations in the first nine months of 2012 was down significantly from the same period last year.

The stock price has dropped 3% year to date against a rising market, which has placed Sealed Air at a market capitalization of $3.3 billion. Wall Street analysts expect earnings of $1.29 per share for 2013, which implies a forward price-to-earnings multiple of 13x. We're not sure we would be that optimistic: Even stripping out the goodwill impairment, operating income does not compare particularly well with that of a year earlier, and interest expenses are up strongly.

Last quarter, Sealed Air's earnings before taxes came to about $50 million, or about $0.26 per share. That's roughly $1 per year annualized, pretax. In order for the roughly $17 stock price to make sense, we think the company would need to start growing its business organically or significantly reduce expenses. We'd also note that Sealed Air has a history of underperforming analyst targets: It has delivered a negative surprise in adjusted earnings each of the last four fiscal quarters, and in two of those cases the miss has been by greater than 40%. With that performance history, we'd be skeptical of the sell side's current earnings projections.

It seems to us that Sealed Air would need to start doing a number of things right in order to prove that the stock is undervalued at the current price. More likely, we feel, is that the shares will muddle through for the next few years with little change in its revenue and earnings -- or even decreases, perhaps. In this scenario, it wouldn't represent a good value.

It's possible management could actually deliver better earnings numbers, which would then lead to a substantial upside for the company, and that seems to be what Manning expects here. However, his purchases historically haven't performed well. We think that investors can likely find better values in the market, and so we would avoid the stock.

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