Sealed Air 1
Sealed Air Corporation Equity Analysis and
Valuation
Project Group Members:
Austin Robertson [email protected]
Katie Kniess [email protected]
Megan Wilson [email protected]
Colin DuBois [email protected]
Justin Matthews [email protected]
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Table of Contents
Executive Summary 7
Business and Industry Analysis 14
Company Overview 14
Industry Overview 15
Five Forces Model 17
Rivalry Among Existing Firms 18
Industry Growth 18
Concentration of Competitors 20
Level of Differentiation 22
Economies of Scale 22
Degree of Switching Costs 23
Excess Capacity 24
Exit Barriers 25
Conclusion 25
Threat of New Entrants 25
Economies of Scale 26
First Mover Advantage 27
Access to Channels of Distribution 28
Legal Barriers 28
Conclusion 29
Threat of Substitute Products 30
Relative Price and Performance 30
Customers Willingness to Switch 31
Conclusion 31
Bargaining Power of Customers 32
Price Sensitivity 32
Relative Bargaining Power 32
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Bargaining Power of Suppliers 33
Price Sensitivity 34
Relative Bargaining Power 34
Key Success Factors 36
Cost Leadership 36
Simpler Product Designs 37
Cost Control 37
Lower Input Costs 37
Economies of Scale and Efficient Production 38
Differentiation 38
Research and Development 39
Brand Image 40
Product Appearance 40
Quality 41
Delivery 41
Conclusion 41
Competitive Advantage Analysis 42
Economies of Scale 42
Cost Control/Input Costs: 43
Simpler Product Design 44
Research and Development 44
Quality and Brand Imaging 45
Delivery 46
Conclusion 46
Formal Accounting Analysis 46
Key Accounting Policies 47
Research & Development 48
Operating and Capital Leases 50
Pension Liabilities 51
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Goodwill 53
Currency Risk 56
Accounting Flexibility 57
Research & Development 58
Operating and Capital Leases 59
Pension Plans 60
Goodwill 62
Currency 63
Evaluate Accounting Strategy 64
Research and Development 64
Operating and Capital Leases 66
Pension Plans 67
Goodwill 69
Currency 71
Quality of Disclosure 71
Research and Development 72
Operating and Capital Leases 73
Pensions 73
Goodwill 74
Currency 74
Quantitative Analysis 75
Sales Manipulation Diagnostic 76
Net Sales/Cash from Sales 76
Net Sales/Accounts Receivables 77
Net Sales/Inventory 79
Conclusion 81
Expense Manipulation Diagnostic 81
Asset Turnover 81
CFFO/OI 83
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CFFO/NOA 85
Total Accruals/Sales 87
Conclusion 88
Potential Red Flags 88
Undoing Accounting Distortion or Irregularities 89
Financial Analysis, Forecasting Financials and Cost of Capital Estimation 95
Financial Analysis 95
Liquidity Ratio Analysis 95
Current Ratio 96
Quick Asset Ratio 97
Working Capital Turnover 98
Accounts Receivables Turnover 99
Days Sales Outstanding 100
Inventory Turnover 101
Days Supply Inventory 102
Cash to Cash Cycle 103
Conclusion 104
Profitability Analysis 105
Gross Profit Margin 105
Operating Expense Ratio 106
Operating Profit Margin 107
Net Profit Margin 108
Asset Turnover 109
Return on Assets 110
Return on Equity 111
Internal Growth Rate 112
Sustainable Growth Rate 113
Conclusion 115
Capital Structure Analysis 116
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Debt to Equity 116
Times Interest Earned 118
Debt Service Margin 120
Z-score 121
Conclusion 122
Estimating Cost of Capital 123
Cost of Equity 123
Alternative Cost of Equity 125
Cost Of Debt 125
Weighted Average Cost of Capital 126
Financial Statement Forecasting 127
Income Statement 127
Income Statement (Revised) 134
Balance Sheet 137
Balance Sheet (Revised) 141
Statement of Cash Flows 145
Statement of Cash Flows (Revised) 149
Conclusion 153
Valuation Analysis 153
Method of Comparables 153
Price/Earnings Trailing 154
Price/Earnings Forecast 155
Price/Book 156
Price Earnings Growth (P.E.G.) 157
Price/EBITDA 158
Enterprise Value/EBITDA 158
Price/Free Cash Flows 160
Dividends/Price 161
Conclusion 162
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Intrinsic Valuation Models 162
Discounted Dividends Model 162
Discounted Free Cash Flows Model 164
Residual Income Model 167
Abnormal Earnings Growth Model (A.E.G.) 170
Long Run Residual Income Model 172
Analyst Recommendations 174
Appendices 178
References 209
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Executive Summary
Investment Recommendation: Overvalued Sell as of June 1st, 2008
SEE ‐ NYSE (6/1/2008) $24.36 Altman Z‐scores 52 Week Range: $ 19.62 ‐ $ 31.51 2003 2004 2005 2006 2007Revenue: $ 4.65 Billion Initial Scores: 7.73 6.28 7.42 9.02 6.68 Market Capitalization: $ 3.94 Billion Revised Scores: 7.64 6.21 7.37 8.97 6.64 Shares Outstanding: 161,624,030
Current Market Share Price (6‐1‐08) $24.36
Initial Revised
Book Value Per Share: $12.50 $3.63 Financial Based Valuations Return on Equity: 21.33% 14.70% Initial Revised Return on Assets: 7.03% 5.88% Trailing P/E: $28.96 17.95 Forward P/E: $30.98 $30.98 Dividends to Price: $10.46 N/A
Cost of Capital Price to Book $33.24 $9.65
Estimated R‐Squared Beta Ke P.E.G. Ratio $14.37 $8.91 2 ‐Year ‐0.004 0.44 8.07% Price to EBITDA: $21.79 N/A 3 ‐Year 0.011 0.46 8.18% Enterprise Value/ EBITDA: $41.43 $16.69 4 ‐ Year 0.093 0.78 10.45% Price to Free Cash Flows: $7.52 N/A 5‐Year 0.139 0.87 11.07%
6 ‐ Year 0.105 1.85 17.93% Intrinsic Valuations Initial Revised Discounted Dividends: $6.87 N/A Back Door Ke: 16.21% Free Cash Flows: $14.29 $14.21 Published Beta: 0.47 Residual Income: $18.58 $18.09 Cost of Debt: 4.76% Long Run Residual Income: $21.30 $18.17 WACC (BT): 7.10% Abnormal Earnings Growth: $17.13 $17.21
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Industry Analysis
Sealed Air was founded in 1960, and has since become a global leader in the
food packaging and containers industry. Through the years, they have expanded their
business by acquiring different brands such as Instapak and Cryovac. SEE operates in
over fifty countries worldwide and has more than 17,000 employees.
Sealed Air has four main competitors within the industry: Pactiv, Bemis, Greif,
and Packaging Corp. of America. These firms produce very similar products, which
creates a challenge for firms to gain a competitive advantage. Employing a cost
leadership strategy is crucial for success in this industry, because most packaging
products are considered commodities rather than highly differentiated. Firms focus on
simpler product designs, tighter cost control, and more efficient production methods.
Differentiation techniques are harder to locate within the industry, however they do
exist. For example, most firms in the industry do not invest heavily in R&D. However,
Sealed Air’s R&D budget is over twice the industry average, thus distinguishing them
from their competitors. The analysis of the five forces model gives an idea of the
degree of competition in each segment of the industry:
Competitive Force Degree of Competition
Rivalry Among Existing Firms High
Threat of New Entrants Low
Threat of Substitute Products Moderate
Bargaining Power of Customers High
Bargaining Power of Suppliers Low
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Due to the small amount of differentiation in the industry, there is a high level of
competition among existing rival firms. Conversely, the threat of new entrants is low for
a couple of reasons. The industry is already fairly well established and the large amount
of capital needed becomes a deterrent for new firms. Legal barriers also keep the threat
of new entrants to a minimum. The lack of high switching costs results in a moderate
threat of substitute products. Customers are generally willing to switch between
products for a small change in price. Consequently, the high price sensitivity in the
industry gives customers the power, not the suppliers.
Accounting Analysis
The main objective for this section is to identify Sealed Air’s key accounting
policies, and assess whether or not these policies accurately portray the firm. The level
of disclosure in a firm’s financial statements is vital for evaluation purposes. Full
disclosure gives shareholders and analysts the most accurate and faithful “snapshot” of
a firm. In an effort to hide or skew numbers, many firms will only disclose the bare
minimum that is required by the SEC, which leads to numerous distortions within the
report.
Some of the key accounting policies for the packaging and containers industry
include R&D, goodwill, and pension plans, to name a few. SEE’s level of disclosure in
these areas varies but generally remains consistent with industry trends. Sealed Air
does a poor job of disclosing their R&D, despite having considerably more invested than
the other firms. Greif doesn’t even attach a numerical value to their R&D, which
indicates the overall lack of disclosure in the industry. Sealed Air had a moderate
amount of disclosure for their pensions. However, other firms disclosed more
information regarding how they formulated their discount rates. Other policies, such as
currency and leases, are consistent with industry norms.
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Quality of
Disclosure
Research &
Development
Pension
Plans
Goodwill Currency Leases
Sealed Air Low Moderate Low Moderate High
Packaging
Industry
Low Moderate Low Moderate High
*Packaging Industry: Greif, Pactiv, Sealed Air, Bemis, & Packaging Co. of America
Sealed Air has a very large amount of goodwill, and unfortunately, did a poor job
of disclosing it. GAAP regulations require that if the book value of goodwill exceeds the
fair market value, then the excess amount should be impaired and expensed
throughout the income statement. SEE provided some allocation tables of goodwill in
their 10-k, but failed to explain how the goodwill was acquired or how the quantitative
analysis of these values were reached. Furthermore, there is insufficient information
regarding the impairment of goodwill over the past four years. Goodwill seems to be
Sealed Air’s only KSF that likely contains some distortions from their lack of disclosure.
Throughout this report, we adjusted the income statement and balance sheet to reflect
the changes if goodwill had been properly written off. Overall, Sealed Air needs to
improve their disclosure to give investors a more accurate estimate of the firm’s value.
Financial Analysis, Cost of Capital Estimation, and Forecasting
In order to get a better comprehension of a company’s true performance, we
find and compare financial ratios to measure certain operations of the firm and how it
performed in relation to their competitors. Some of the financial ratios that we
measured were liquidity, profitability, capital structure and firm growth. Liquidity ratios
measure a company’s ability to meet short-term financial obligations. These ratios are
commonly used by lenders because they show a company’s credit risk. Overall, Sealed
Air’s liquidity was on par with the industry average. Profitability ratios on the other hand
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measure how well a firm’s revenue covers their expenses or how effectively a company
generates profit. Each of the following ratios is shown as a percentage of sales; where
sales (the denominator) equals 100%. In this regard, Sealed Air has consistently
outperformed the packaging and container industry. Rather than measure performance,
capital structure analysis shows the financing of the firm and its operations. There are
two ways a company can finance their assets, either through borrowing money from a
lender (debt) or selling shares of their company as stock (equity). These capital
structure ratios can be used to measure firms’ credit worthiness, financial leverage,
ability to cover interest charges, and the ability to pay off liabilities. By closely
examining the capital structure of Sealed Air, we can see that the firm lags behind its
competitors. From there, we examined the potential growth rates of the firm to get an
idea of future profitability. The two growth rates we discussed were the sustainable
growth rate and the internal growth rate, which both estimate potential growth
opportunities for the firm.
The next step in our prospective analysis was the cost of capital estimation. In
order to find the appropriate discount rate for our valuations, we had to find the
weighted average rates of both debt and equity financing. To find the equity cost of
capital, we first calculated beta from a regression analysis. We then decided to use the
10-year interest rate on a U.S. Treasury Bill for our risk free rate. By taking an average
of S&P 500 returns, we were able to find our market risk premium. By using the capital
asset pricing model (CAPM), we found the cost of equity for Sealed Air to be 11.07%.
When comparing this figure to the 16.21% backdoor cost of equity, we see that our
estimation somewhat resembles the backdoor method. Next, we found our cost of debt
by taking a weighted average of all the interest rates on debt instruments. With a cost
of debt of 4.76% and a cost of equity of 11.07%, we found a weighted average cost of
capital (before tax) of 7.1% and a WACC after restatement of 5.86%.
The final and most crucial step in financial analysis is the prospective forecasting
of financial statements. Perhaps the single most import figure we forecasted was the
total sales growth rate, which we decided was 8%, only slightly higher than their past 5
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year average. Another key assumption that was made was the growth rate for cost of
goods sold, which we predicted would be greater than the sales growth rate (8.5%)
since most of the input costs have been rising lately. This would explain why both gross
profit and operating profit decrease by greater amounts on an annual basis. It is also
important to note that many of the main assumptions that we used when making our
calculations were results from our liquidity and profitability ratios. For instance, to
forecast out our total assets we simply took our forecasted sales and divided it by our
asset turnover ratio to get the forecasted total assets of that year. This method was
applied to numerous other line items such as accounts receivables and inventory. We
should also point out the degree of accuracy in forecasting. While we are extremely
confident in the income statement estimations as well as the balance sheet, the
statement of cash flows was extremely difficult to predict; mainly due to the lack of
reasonable trends and that many line items were one time only transactions.
Valuations
The final step in the financial statement analysis is the valuation of the firm. The
ultimate goal of the valuation process is to assign a market share price, given certain
operating factors that range anywhere from free cash flows to book values. The
valuations are broken up into two sections, methods of comparables and intrinsic
valuation models. The end result of each formula is to present an expected stock price
per share. We then compare the estimated share price with the quoted share price of
$24.36 on June 1st, 2008, and then set upper and lower limits by a 20% margin of
error. If the estimated price exceeds $29.23 we state the firm is currently undervalued.
If the expected price falls below $19.49 we claim that the company is overvalued.
Our first valuation measure was the method of comparables. Essentially, this is
an implied stock price based on the performance of competitors within the industry. In
these models, the competitors’ ratios are calculated and used to find an industry
average. Any firm with a figure drastically different than the industry norm is classified
as an outlier, and excluded from the average. Once the industry average is calculated,
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it is then multiplied by Sealed Air’s corresponding factor to find the implied price per
share. It should be noted that these formulas are not entirely reliable; these estimates
that are given are dependent upon how other companies are doing, not Sealed Air
itself. Therefore, these comparables can only serve as a guide to merely suggest
industry expectations.
The second measure we used was the intrinsic valuation models. These models
offer the most insight into the true economic value of Sealed Air. Unlike comparables,
these models take into account current financial conditions but also prospective
information about potential profitability, which is backed by a solid foundation in
financial theory. The intrinsic valuations use the forecasted financial statements to
predict company performance, and then are discounted back to present day terms.
When given a certain discount rate and perpetuity growth rate, the models offer an
expected share price which can be compared to the observed share price which is
benchmarked at $24.36. Through sensitivity analysis, we can see how subtle changes in
the cost of capital and growth rates can impact the valuation share price. Perhaps the
only potential flaw with these models is the fact that many of the forecasted statements
are based off of the project team’s assumptions, which are nothing more than educated
guesses.
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Business and Industry Analysis
Company Overview
Sealed Air Corporation was founded in 1960 by inventors Alfred Fielding and
Marc Chavannes who were trying to create textured wallpaper by capturing air in
between thin sheets of plastic. The wallpaper idea did not work out but they realized
their invention would make excellent packaging; which evolved into Bubble Wrap. Now
Sealed Air Corp. is a leading global innovator and manufacture of a broad range of
protective packaging, performance-based materials, and equipment systems that are
essential to many food, industrial, medical, and consumer applications. Since 1976
Sealed Air Corp. has acquired different brands including Instapak, Sentinel, Shanklin,
Jiffy Mailer, and Cryovac. With headquarters in Elmwood Park, New Jersey and
operating in over 50 countries, Sealed Air Corp. demonstrates how better packaging can
make the world a better place.
The company’s Food Packaging division offers industrial food packaging, which
include shrink bags that vacuum package a variety of food products, packaging
materials for applications that can be cooked in, and coextruded and laminated rollstock
packaging materials. Some of their protecting packaging includes bubble wrap,
inflatable packaging and cushioning systems, paper packaging, and foam-in-place
packaging systems. Sealed Air Corp. also produces shrink packaging, specialty materials
and products, including solar pool heating, and medical products, including films for
pharmaceutical bags and ostomy products.
Sealed Air Corp. is a fairly large company with over 100 manufacturing facilities
worldwide and more than 17,000 employees. Sealed Air Corp. is traded on the NYSE
and has a current market cap of $3.80 billion. Their primary competitors include Pactiv
Co. (PTV), Bemis Co. Inc. (BMS), Greif Inc. (GEF), and Packaging Corp. of America
(PKG).
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2003 2004 2005 2006 2007
Total Assets* 4,704.10 4,855.00 4,864.20 5,020.90 5,438.30
Net Sales* 3,531.90 3,798.10 4,085.10 4,327.90 4,651.20
Sales Growth 10.22 % 7.53 % 7.56 % 5.94 % 7.47 %
* in millions
Industry Overview
Sealed Air competes in the packaging and containers industry, which makes up
over a $124 billion market in the U.S. alone. The majority of the market comes from
paperboard and plastic product sales. However, companies often compete in more than
one area of the industry because of the fragmented nature of the market. Some of the
firms include Johnson and Johnson, Bemis, Pactiv, Owens-Illinois, AEP Industries, Greif,
and many more. The firms vary in size, segment of concentration, and profit margins.
Some of these factors help determine the most immediate competitors for each firm in
the industry.
For example, companies such as AEP Industries and Owens-Illinois specialize in
two separate areas of the packaging industry. AEP Industries produces over 15,000
different types of flexible packaging films. This has allowed them to become a leading
producer of silage bale wrap in agriculture packaging (www.aepinc.com). Conversely,
Owens-Illinois is the largest manufacturer of glass containers in the world. Its
innovative packaging products are found in households and businesses, and its
customers manufacture and market many of the best-known consumer-products around
the globe (www.o-i.com). “Packaging specialist Christopher Manuel at KeyBanc Capital
Markets in Cleveland, a unit of KeyCorp, racked up a 168% return on glass-container
maker Owens Illinois Inc., which saw shares surge last year amid a stunning
turnaround under new management” (Wall Street Journal).
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Sealed Air is a leading global manufacturer of a wide range of fresh food,
protective, and specialty packaging products. However, they heavily concentrate in
plastic packaging, including owning the patent of industry leader Bubble Wrap. In
addition to these product differences, the three companies used in this example vary
greatly in size (in both total assets and sales). For these reasons they are not
considered direct competitors of Sealed Air.
Total Assets (in millions) 2003 2004 2005 2006 2007 AEP Industries 457,325 451,950 311,323 336,080 329,028 Sealed Air 4,704,100 4,855,000 4,864,200 5,020,900 5,438,300 Owens - Illinois 9,531,300 10,736,700 9,521,800 9,320,700 9,324,600 Total Sales (in millions) 2003 2004 2005 2006 2007 AEP Industries 558,496 608,228 732,724 802,109 786,015 Sealed Air 3,531,900 3,798,100 4,085,100 4,327,900 4,651,200 Owens - Illinois 4,975,600 6,128,400 6,266,900 6,650,400 7,566,700
The companies that compete most directly with Sealed Air include: Greif, Bemis,
Pactiv, and Packaging Corporation of America. Globally, food packaging accounts for
nearly 40% of all packaging services, and therefore represents a large portion of the
total industry (www.packagingtoday.com).
Johnson & Johnson and Sealed Air are among the industry leaders in research
and development. Companies that highly invest in R&D force other companies in the
industry to focus on factors such as product quality and differentiation to maintain and
grow their market share. Growth rates within the packaging industry range from 3.2%-
5% (www.packagingtoday.com). Overall, a majority of firms in the packaging industry
enjoy reasonable success and steady annual profits. "Packaging stocks are generally
defensive stocks, so when the economy slows these stocks tend to do pretty well," he
(Manuel) says. "You could almost put a 'buy' on any of the stocks and do okay” (Wall
Street Journal).
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Ultimately, this specific industry requires numerous challenges to overcome for
every firm. Competition for Sealed Air’s packaging products is based primarily on
packaging performance characteristics, service and price, and innovations in packaging
technology (Sealed Air, 200710-k). This analysis will provide accurate and useful
information when the companies in this industry are further compared to one another.
Five Forces Model
During the initial phases of valuing a firm it is important to thoroughly
understand the complexity of the industry. The five forces model allows analysts to
apply five key components for measuring the degree of competition among a specific
industry. According to Michael E. Porter, the creator of the five forces model, each of
the five forces is a driver that potentially and actually influences industry profitability.
The model allows analysts to have a clear view of the level of competition which in turn
relates to ability to produce profits. Determining if a firm will be profitable or not in an
industry is key; firm value is based on the potential to generate excess returns on
capital minus the expenditure of capital. Rivalry among existing firms, threat of new
entrants, and the threat of substitute products measure the level of possible
competition. The other part of the five forces model analyzes actual influences of profits
by addressing the industry’s bargaining power in relation to customers and suppliers.
When each of these diverse five elements is pieced together it allows analysts to have a
clear understanding of the grade of competition in the firm’s industry. The following is a
table summarizing our analysis of the five forces and the degree of competition
produced by each segment.
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Rivalry among Existing Firms
When measuring potential sources of competition within an industry, it is
important to consider rivalry amongst existing firms. If an industry is said to be highly
competitive, then the firms that compete in that industry will engage in an aggressive
pricing strategy (the main focus being on cost). If an industry is low on competition
between firms, then firms will pursue other aspects of their products such as brand
image or innovation. Rivalry among existing firms can be broken down into different
fundamentals such as industry growth, concentration of competitors, level of
differentiation, switching costs, economies of scale, excess capacity and exit barriers.
Industry Growth:
If an industry is rapidly expanding, competing firms do not tend to focus on
capturing market share from each other. On the other hand, if an industry is
contracting, then firms will engage in heavy pricing strategies in an attempt to capture
more market share for themselves. A good measure of industry growth is to examine
the net sales of each firm within the industry.
Competitive Force Degree of CompetitionRivalry Among Existing Firms High
Threat of New Entrants Low Threat of Substitute Products Moderate
Bargaining Power of Customers High
Bargaining Power of Suppliers Low
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% Change in Sales
2003 2004 2005 2006 2007
SEE 10.23% 7.54% 7.56% 5.94% 7.47%
PTV 8.96% 7.78% ‐18.51% 5.84% 11.52%
BMS 11.23% 7.57% 22.56% 4.76% 0.27%
GEF 17.37% 15.28% 9.73% 8.42% 26.40%
PKG ‐0.02% 8.91% 5.48% 9.70% 5.90%
Industry 9.55% 9.41% 5.36% 6.93% 10.31%
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As the graph above indicates, total revenues for the packaging and container industry
have been steadily increasing an average of 10.31% during the past fiscal year and a
full 33% over the past five years. Given that the industry has grown by over 10 percent
in 2007, it would be reasonable to assume that the packaging and container industry is
experiencing excellent industrial growth and therefore faces little price competition in
this regard.
Concentration of Competitors:
The level of concentration in an industry is determined by the number of
competing firms as well as their relative size. If the sizes of the firms are fairly similar
and the balances of the firms’ market share are relatively equal, then the firms will
typically coordinate pricing strategies to match one another. However, if the industry is
relatively fragmented, then firms will engage in aggressive pricing tactics.
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Market Share (as a % of Total Industry Sales)
2003 2004 2005 2006 2007
SEE 27% 27% 28% 28% 27%
PTV 24% 24% 19% 19% 19%
BMS 20% 20% 24% 23% 21%
GEF 15% 16% 16% 17% 19%
PKG 13% 13% 14% 14% 13%
Industry Sales $12,956,893,000 $ 14,113,861,000 $ 14,733,005,000 $ 15,699,784,000 $ 17,191,781,000
The market share of each firm displays a simple representation of the concentration
levels of the industry. As the table above shows, we can see that for the most part all
competing firms in the industry maintain their respective market share with the
exception of Bemis surpassing Pactiv since 2005. With each competitor maintaining a
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reasonable market for an extended period of time, we can conclude that the packaging
and container industry is of low concentration and relatively highly price competitive.
Level of Differentiation:
If the product lines of competing firms are very similar in nature, then the
industry would be classified as having low degrees of differentiation, meaning that
customers would readily switch from one competitor to another strictly on basis of
price. In industries where we see a lack of product diversification, we typically find the
business to be highly price competitive. Since the products that these firms offer the
same function and are generally a commodity in nature, the packaging and container
industry is characterized as having low levels of differentiation, thus making the
industry highly price competitive.
Economies of Scale:
If an industry usually has a steep learning curve or has a high scale economy,
then firms that are typically bigger are generally more profitable in that industry. This is
due to the fact that greater production capacity allows firms to decrease the average
cost per unit, which in turn leads to aggressive pricing competition amongst firms. Since
most of the firms’ production assets in the packaging industry are extremely specialized
and require an expensive initial investment, it would be hard for small to medium range
firms to succeed in this industry. A good measurement for production assets would be
the total property, plant, and equipment found on the firms’ balance sheets.
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As the table indicates, contending firms must invest heavily in their production
assets to compete in this industry. At one point, a few firms had about 70% of total
assets invested in their production resources. It is also important to note that a slightly
declining trend has been emerging in this industry. This is explained through Sealed
Air’s annual financial report that the technology is rapidly improving productivity and
thus allowing PP&E to become less and less of the firms total assets. Therefore, the
packaging industry would exhibit large economies of scale and therefore would display
characteristics of high price competition.
Degree of Switching Costs:
Much like the economies of scale, the degrees of switching costs for firms helps
measure the level of specialization within an industry. If the production assets perform
a specific function that requires highly customized equipment, that means that those
assets cannot be sold to buyers in other industries. If switching costs for firms are very
high, then that increases the commit of the firm to the industry; therefore that
increases the risk of the industry overall. Since the packaging and container industry
generally has a heavy investment in plant and equipment, we can generally assume
that Sealed Air exits in an industry with high switching costs.
Total PP&E (in thousands)
2003 2004 2005 2006 2007
SEE $ 1,042,400 $ 1,008,600 $ 911,200 $ 970,100 $ 1,080,100
PTV $ 1,522,000 $ 1,445,000 $ 1,141,000 $ 1,093,000 $ 1,264,000
BMS $ 1,615,308 $ 1,687,001 $ 1,143,539 $ 1,175,959 $ 1,248,456
GEF $ 912,375 $ 880,682 $ 862,056 $ 940,949 $ 1,125,437
PKG $ 1,345,154 $ 1,345,154 $ 1,320,511 $ 1,252,291 $ 1,215,298
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Excess Capacity:
“If the capacity in an industry is larger than customer demand, there is a strong
incentive for firms to cut prices to fill capacity” (Palepu and Healy). Therefore, if there is
high excess capacity within an industry, firms must cut prices in order to avoid too
much excess inventory. On the other hand, if demand far exceeds what the industry
can supply, then firms generally avoid competitive pricing strategies. Although there
might be many firms that compete in the packaging and containers industry, global
demand does not seem to be slowing down, which is evident by the growth in net sales
for the industry the past 5 years. A good way to measure this is by taking the years
sales and dividing them by the company’s total PP&E.
Sales / Total PP&E
2003 2004 2005 2006 2007
SEE 3.39 3.77 4.48 4.46 4.31
PTV 2.06 2.34 2.42 2.67 2.57
BMS 1.63 1.68 3.04 3.09 2.92
GEF 2.10 2.51 2.81 2.79 2.95
PKG 1.29 1.41 1.51 1.75 1.91
As the graph above indicates, most of the industry’s ratios are relatively
increasing; meaning that growing sales are able to cover more and more of the firms
fixed assets. It is from this information that we can conclude that the industry lacks
excess capacity, which in turn lowers price competition between existing firms.
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Exit Barriers:
If firms have highly specialized resources or many fixed/long-term assets that
are essential to production, exit barriers are said to be high in this industry. The higher
the exit barriers are, the higher the fixed to variable costs ratio, which therefore has a
significant influence on price. If firms are highly invested in their property, plant, and
equipment (which is evident by the high economies of scale discussed earlier), the
competing firms will continue to operate even at a loss since exiting the industry is
perceived to be even more costly. Since nearly all of the production assets within the
packaging industry are highly specialized, this industry is classified as having high
barriers to exit and thus highly competitive.
Conclusion:
Since rivalry amongst firms is a significant tool when measuring an industry’s
degree of actual and potential competition, it is imperative to evaluate the
characteristics that comprise competing firm rivalry. Given that concentration of
competitors, level of differentiation, degree of switching costs, economies of scale and
exit barriers all lead to high price competition while only industry growth and excess
capacity lead to low competition, we can conclude that the packaging and container
industry is heavily price competitive in regards to rivalry amongst competing firms.
Threat of New Entrants
Every industry faces the threat of new entrants. The degree of this threat
depends on five components; economies of scale, first mover advantage, distribution
access, consumer and supplier relationships, and legal barriers. Each of these elements
serves as a building block to the threat of entrances into the packaging and
containment industry as a whole. Threat of entry is an important part of the five forces
model that helps analyze industries. If a new entrant thinks that profitable abnormal
returns are easily attainable then the firm may not be hesitant to enter the industry.
However, when new entrants consider entering an industry they may conclude that the
Sealed Air 27
difficulty of entry is too great based on barriers such as distribution access, consumer
and supplier relationships, first mover advantage, legal barriers, and economies of
scale. It is important for not only new entrants to consider all of these building blocks,
but also existing firms in the industry because it could lead to loss of market share or
worse loss profits to new entrants. The following are the analysis and conclusions that
we composed of the threat to new entry on the packaging and containment industry.
Economies of Scale:
Economies of scale consistently seem to be large barriers of entry for new firms
in the packaging and containing industry. Economies of scale refer to the decrease in
cost per unit as production reaches optimal output levels. Common economies of scale
deal with firms that buy large quantities of commodities, handle materials in bulk, and
are cost efficient. One typical characteristic of economies of scale is that they have high
fixed cost and constant lesser marginal cost. New entrants in the packaging and
containment production industry will face large cost drawbacks in an already well
established industry. This arises from the considerable cost of capital that entrants in
this industry need to have in order to develop expert research and development teams,
physical plants, property, and manufacturing equipment. To illustrate this high level of
capital the following is Sealed Air’s asset balance of pp&e for 2007 which was a total of
1936.1 (Sealed Air 2007 10-k). In addition to substantial sums of capital to fund
research and development teams, plant, property, and equipment firms will also incur
the upward surging costs of raw materials needed to produce products. Although raw
materials and production can be outsourced, it is still extremely costly to establish the
start up phase of creating a new packaging and container firm.
In regards to outsourcing and the price of raw materials, it is important for any
U.S. domicile company to take into consideration the rising cost in commodities, rise in
inflation, and the recent overall fall in the strength of the dollar to foreign currency. To
illustrate this concern the following is a quote from the Wall Street Journal after a
recent announcement from head chairman of the Fed Ben Bernanke, “Mr. Bernanke,
Sealed Air 28
speaking via satellite to the conference in Spain, stressed that the weak dollar has
contributed to an ‘unwelcome rise in import prices and consumer-price inflation.’"
The cost of capital is an important obstacle to overcome for many new entrants
because it determines if they plan to enter the market by taking a larger or smaller role.
As with many new entrants into any industry it is difficult to attain the mass amounts of
capital needed to take a large role in the market. This is important to us because we
know this causes a disadvantage for new entrants into the packaging industry. New
entrants have to take a smaller role in the market due to the lack of capital needed for
economies of scale. New entrants taking the smaller role can lead them to be deterred
from entering the packaging and containment industry all together; thus leaving ample
room for expansion in the market for already well established industry firms such as
Sealed Air, Pactiv, Bemis, Packaging Corporation, and Greif Inc.
First Mover Advantage:
Entering into a market where a firm has already established exclusive rights,
industry standards, and contracts with suppliers proves to be another large deterrent
for many new entrants; this is called first mover advantage. First mover advantage is
when substantive firms in the industry are able to discourage new entrants in saying
that the first well established businesses in the field have already staked their claim and
already determined industry conventions. A new entrant will likely suffer from having to
pay higher prices for raw materials compared to an already established firm with
selective ties to raw material suppliers. First mover advantage not only can defer
entrants due to supplier relations, but the first mover advantage also creates brand
loyalty with consumers. Consumers may not deviate to new products by new producers
in fear of quality control or price control. After all aspects of first mover advantage are
taken into consideration, it would be difficult for new entrants into the packaging and
containment industry to obtain this advantage and thus would not pose a threat of
entry for already existing firms.
Sealed Air 29
Access to Channels of Distribution and Relationships:
Strict management of channel distribution is a common way for established firms
to cut cost and produce a less expensive good giving the firm a cost advantage.
However, establishing these channels of distribution for a new entrant can be a
daunting task. New entrants can incur high fees, limited capacity, and suffer from a lack
of knowledge in negotiating contracts with distributors. In the packaging industry,
channels of distribution play a key role on both demand and supply. Other industries
such as food, shipping, and medical greatly demand and rely on the packaging products
produced by firms such as Sealed Air, Pactiv, and Bemis. On the other hand, without
excellent channels of distribution access and communications through intermediaries
packaging firms would not be able to meet the supply to the demand. The following is a
quote from the Wall Street Journal about the importance pertaining to the need to keep
strong relationships with all suppliers in distribution channels, “The biggest players in
the world can’t function without smaller ones to keep them supplied, technologically-
sound, and otherwise ticking” (Wall Street Journal). New entrants must be wise and
careful when creating connections to channels of distribution as they can be extremely
detrimental or beneficial in the long run. Although access to channels of distribution can
produce itself as a barrier for some, it is not an impossible obstacle for new entrants to
overcome. New entrants would not see this as a threat of entry due to the low level of
difficulty to access channels or maintain healthy relations with suppliers. Therefore,
when analyzing the packaging and containment industry access to channels of
distribution and relationships with suppliers is not a strong threat to new entrants.
Legal Barriers:
Legal barriers do act as a powerful restraint to new entrants into the packaging
and containment industry. For example, patents for new packaging technology,
trademarks, exclusive selling contracts, licensing agreements, real estate and zoning
permits for manufacturing plants, and health and safety regulations are just some of
Sealed Air 30
legal barriers that new entrants into the packaging and containment industry must
consider. Legal barriers not only present political red tape problems, but also normally
need large sums of capital to adhere by. Companies are having difficulty negotiating
outsourcing overseas due to lack of communication and lack of knowledge of the
overseas legal environment are having to spend extra capital on hiring people who have
expertise in both domicile and overseas relations. “Managers must know, for example,
the differences in legal and economic environments and trade practices in different
countries, and they must have the ability to communicate across cultural barriers. Or, if
they can't do all that themselves, they must hire people who can do the job for them”
(The Wall Street Journal).
In addition, environmental protection, conservatism, and ordinances are a few
other legalities that must be abided by when operating a manufacturing plant and
dealing with hazardous raw materials in any industry. U.S. domicile firms in the
packaging industry must also follow mandated laws and policies of other countries and
careful of political turmoil when outsourcing raw materials and production. In our
opinion, legal barriers in the packaging and containment industry would greatly hinder
the ability of new entrants to successfully infringe on the packaging market.
Conclusion:
In conclusion we feel that the threat of new entrants to the packaging and
containment industry is low. Although entry into the industry is not impossible, it does
pose a great threat of failure to new firms attempting to encroach on the already
established industry. We believe that the large amounts of capital needed for start ups
in this industry is one of the main deterrents to new entrants. For example, as
mentioned earlier in the economies of scope section, the ability alone to attain the
capital and financing needed for the physical manufacturing plant, property, equipment,
and raw materials poses a monumental obstacle for new entrants. Furthermore, we
believe that the legal barriers in the packaging and containment industry are another
strong impediment that makes the threat of new entrants minimal.
Sealed Air 31
Threat of Substitute Products
The threat of substitute products depends on some key factors including the
price, performance, and the customers’ overall willingness to substitute. Not all
companies in this industry provide the same products. However, they all perform similar
functions as far as packaging is concerned. The slight variations from company to
company provide a fairly broad range of competitive products for the customer to
choose from. For example, paper and glass goods could be considered substitute
products to a company like Sealed Air, who uses primarily plastic bubble wrap for their
packaging. The companies that are most profitable combine this innovation with a price
that attracts value-seeking customers.
Relative Price and Performance:
In industries with low product differentiation between competitors the prices will
tend to be very similar, causing a high level of price competition. Conversely, industries
that feature high product differentiation between products have lower price competition
and thus greater leeway in the prices that each company sets.
Obviously, the packaging industry falls in between this wide spectrum.
Companies offer different products and materials depending on the specific packaging
desired, thus, allowing for some price variation. Companies must still be price sensitive
against their competitors. If a customer is purchasing a food item that needs to stay
fresh for a long period of time they will most likely value the best materials, regardless
of price to a certain degree. On the other hand, if the customer plans on using the
packaging for a very short period, they will be more willing to substitute a cheaper
paper bag for a plastic one.
Performance is vital for a customer who expects a quality product. Many
companies in the foodservice and packaging portion of the industry rely on products to
perform to their satisfaction. If the product failed they could lose a tremendous amount
of business from their loyal customers. Choosing the right packaging option is
paramount for these particular companies.
Sealed Air 32
Customers Willingness to Switch:
When competing firms in a given industry offer similar products, the customers’
willingness to switch can result from a miniscule price difference such as five cents or
less. A company must succeed in providing customers with additional benefits that
separate it from the competitors, and ultimately strive for the concept of brand loyalty.
Competition is based primarily on packaging performance characteristics, service, and
price, as well as innovations in packaging technology, and the ongoing research and
development programs to enable it to maintain technological leadership (Sealed Air 10-
k 2007).
The packaging industry can have a moderate amount of switching costs for customers,
especially for those in the foodservice segment. This requires them to spend some time
and money to research different companies within the industry to find the best fit for
their packaging need.
Conclusion:
In order to succeed in an industry where customers are willing to substitute
products, firms must focus on their core competencies. They must continue to attract
new customers to remain profitable and to reach future growth expectations. As
mentioned before, companies can keep some loyal customers from brand loyalty to a
certain degree. However, with the absence of high switching costs, a customer will
always be subject to look elsewhere for substitute products when the need arises.
Overall, the threat of substitute products in the packaging industry is moderate.
Sealed Air 33
Bargaining Power of Customers
(Thousands) of packages are shipped daily around the world today, containing
anything from a glass vase for a friend to a truck load of meat from a supplier to a
restaurant or grocery store. Packing material, from bubble wrap to case-ready meats,
are used by a great deal people in today’s world. With many companies in the package
and container industry, producers should have a competitive price.
Price Sensitivity:
Price sensitivity of a customer is determined by their perceived value of the
product and its cost. When there are few switching costs, when they can easily take
their money elsewhere, and when the product is undifferentiated, then the customers
have a tendency to be more price sensitive. Due to the number of companies in the
packaging and container industry, there are low switching costs which lead to higher
price sensitivity of the customer. Customers decided to buy from one packaging
company than another based on the price of the product. If one packaging company
were to raise their prices then it would not be unreasonable to say that their customers
would take their business elsewhere.
Another aspect to be noted is that the customers of the package and container
industry do not look at quality because the products in this industry are not meant to be
used for long amounts of time. For example, bubble wrap does not have a long lifetime
and meat packaging trays will not be used over and over. And since there is not much
differentiation in packaging materials, the customer wants something that will do the
job at the lowest price possible.
Relative Bargaining Power:
The customers’ relative bargaining power determines the extent to which they
can force a drop in prices. In any transaction, the bargaining power depends on the
cost to each party of not doing business with the other party. So, the bargaining power
Sealed Air 34
of the customer would be decided by the cost to the industry of the customer not doing
business with them.
In the case of the packaging and container industry, the major consumers are
other companies, such as FedEx and UPS. Now, if these companies were to take their
business from one packaging company to the next, then that would have a large impact
on the packaging company. As discussed earlier, a customer would be able to switch
from one company to the next with ease. One thing to look at would be alternative
products available to the customer; for instance, whether they want bubble wrap or
recycled paper padding, or regular vs. easy-open bags. With countless alternative
products available to the customer in this industry the bargaining power is in their
hands.
Conclusion:
The customers in the packaging and container industry have large amounts of
bargaining power over the companies. Since there is little product differentiation and
low switching costs, a customer could easily take their business elsewhere if they did
not like the cost of the products. Also, given that the majority of the industries’
customers are other companies, which buy in bulk, the loss of their business would be
hard on the packaging company; giving the customers, again, the power to bargain.
Bargaining Power of Supplier
The bargaining power of the supplier is based upon the supply and demand from
the customers. The more supplies demanded from the market will directly increase the
number of suppliers. In the packaging industry there is a large demand, therefore
there are a large number of suppliers for the materials used to make the products. With
this large quantity of suppliers to choose from it leaves the supplier with a very low
amount of bargaining power. The fact that the majority of the suppliers are equal in
price and quality also decreases their power.
Sealed Air 35
Price Sensitivity:
The packaging industry tends to be very price sensitive due to the large number
of suppliers with very little differentiation. In many cases in the industry a supplier will
compete for the contract of the companies by offering a slightly lower price. To renew
these contracts the supplier must be willing to compete in price along with maintaining
quality and dependable delivery. Part of this competition comes from the lack of
switching cost in the industry which increases their price sensitivity. Switching cost is
the cost that a company would incur if they were to switch their supplier. This increases
their price sensitivity because the company does not have to worry about additional
cost and can focus on the bottom line price of the product. Plastic is the main
component of the packaging industry’s products. This is important because, since the
cost of plastic is the main cost of the company, it causes the company to strengthen
their search for the best price. For example in a glass bottling company would be very
concerned with the price of glass considering the impact it has on their total cost. On
the other hand, they would not be very concerned with how much they spend on
cleaning products because it would be such a minute cost. The fact that there is very
little differentiation among products, small switching cost, and a majority of cost
focused on main products makes the packaging industry very price sensitive.
Relative Bargaining Power:
The amount of relative bargaining power is based on the opportunity costs that
the buyer and supplier will have if they do business. The more profit that they can
make from doing business with each other will result in less bargaining power they will
have over the other. Another factor is that of switching cost. Switching cost is the cost
a company incurs when going through the process of changing to a different supplier.
The higher the switching cost the more power the supplier will have over the company.
In the packaging industry the switching cost for a company is relatively low,
which does not contribute to the bargaining power of the supplier. A main contributing
aspect for the bargaining power of the supplier is the possibility for use of an alternate
Sealed Air 36
product. The suppliers in this industry have to worry about the ability for the packaging
industry to alter the materials used based upon what suppliers are willing to offer. For
example if plastic suppliers were to raise their prices beyond a certain amount then the
foam cushions would be predominantly used over the air cushion type products, which
are made of plastic, in packaging. Since there are areas in which the packaging industry
could alter their product, this causes the suppliers to not have as much power in fear of
losing business.
The number of suppliers compared to the number of customers has a large
affect on the strength of bargaining power the supplier holds over the companies in the
industry. Suppliers of the packaging industry lack bargaining power because there are
many alternative suppliers to choose from at any given time. An example is the option
of packaging industries to switch to recycled plastic. “Boosted recycling rates in states”
shows that companies are actually moving towards recycled plastic (Wall Street
journal). This will directly decrease the bargaining power of the supplier of non
recycled plastic in the packaging industry. Forward integration is a form of integration
which involves the purchase of a company by the supplier. The fact that a supplier who
is so close to the industry could take over your business is a serious threat to the
company; this increases the bargaining power that the supplier possesses over the
company. An example in the packaging industry would be if CP Polymers (a plastic
manufacturer) where to purchase Bemis Company Inc. The threat of forward
integration is the only factor that helps the suppliers of the packaging industry gain
bargaining power. Other factors related to relative bargaining power such as the
amount of suppliers, lack of switching cost, and the possibility of another product being
used has greatly limited the power that the supplier has over the packaging industry.
Number of
suppliers Switching Cost
Differentiation Volume Per Supplier
Forward Integration
Price Sensitivity
Price Sensitive
Price Sensitive
Price Sensitive N/A N/A
Sealed Air 37
Relative Bargaining Power
Low Low Low Low High
High price sensitivity and a small amount of bargaining power has left the
suppliers of the packaging industry at the mercy of the industry. This means that
suppliers will compete for the business of the companies in the industry. The industry
will help choose the price of the product along with when and how it will be delivered.
This allows companies in the packaging industry to lower their price and have reliable
sources of supplies.
Analysis of Key Success Factors for Value Creation in the Industry
Much in the way that the key success factors identified industry structure and
potential for profitability, analysis of those factors is imperative to measure a firm’s
competitive business strategy, or how firms position themselves within a particular
industry. The two prominent strategies are cost leadership and differentiation. It is
essential for firms to identify their competitive strategy in order to remain successful
within that industry and to create value for their respective shareholders. Although the
main focus of the packaging and container business is cost leadership, the industry still
displays characteristics of both strategies and therefore is important to discuss both
perspectives and how each factor plays a role in the market.
Cost Leadership
Since the packaging and container industry manufactures very similar products
that perform the same purpose, switching costs for consumers is extremely low and
thus making the industry heavily price competitive. To succeed in this environment,
rival firms must pursue a cost leadership business strategy in order to remain
successful. A few characteristics of the industry that display cost leadership are simpler
Sealed Air 38
product designs, tight cost control, lower input costs, economies of scale, and efficient
production.
Simpler Product Designs:
Packaging containers are generally thought of as commodities rather than highly
differentiated products. Firms in this industry typically avoid too much creativity in
product design. Although firms in this industry spend capital on research and
development, it pales in comparison to other industries such as the technology sector or
the automobile industry. This simple approach to product design facilitates the mass-
production of products.
Cost Control:
Given that the packaging and container business is heavily price competitive,
firms must cut cost wherever possible in order to maintain a competitive advantage in
the industry. This is a difficult task in this industry since most of the product line is
mass-produced through highly specialized machines that leads to a higher fixed to
variable cost ratio. In order for firms in this industry to succeed, they must eliminate
any discretionary spending that is not essential to the firm’s core competencies, such as
investments in brand advertising.
Lower Input Costs:
Another way in which firms can lower their costs is though exercising price
control over suppliers. Since the main resource used in the industry is plastic, which
happens to be supplied by many chemical manufacturing companies, the packaging and
container industry can dictate both price and terms of their purchases. However, there
have been major inconsistencies for this rule. Recently, the price of petroleum (the
main ingredient in plastic polymers) has rapidly increased to record highs. This causes
many suppliers of plastics, namely major chemical companies such as Dow and
Huntsman, have increased their prices by nearly 20%. “Dow said the price increases
Sealed Air 39
will take effect on June 1 for all its chemicals and plastics, used in thousands of
products from paints and adhesives to insecticides and packaging. The move came as
little surprise to industry watchers since prices for natural gas, a key chemical industry
feedstock, have jumped by 56 percent since the end of 2007, and crude oil prices have
risen 32 percent to above $125 per barrel” (Reuters via yahoo finance). If this price
surge continues, then the bargaining power of firms of suppliers might shift for this
industry.
Economies of Scale and Efficient Production:
Packaging and container materials are generally mass-produced through an
efficient and mechanical process. Since this production method is highly automated, the
industry exhibits steep learning curves and high economies of scale which both serve as
barriers to potential competitors. This manufacturing process offers a large volume of
production with very little input. This enables firms in the packaging industry to lower
their average costs per unit, which in turn serves as a savings to the customer without
harming the firm’s profit margins. This advantage is imperative in order to succeed in a
cost leadership strategy.
Differentiation
Firms following the differentiation strategy look for a way to distinguish
themselves from the rest of the industry. For firms to compete with differentiated
products, they must first figure out how to improve the current products to appeal to a
group of customers. While accomplishing this they must appeal to the customer
through reputation or advertising. Then the firms must find a price low enough that the
consumer will purchase the product but the company will still make a profit. Companies
will use many tools to gain an advantage through differentiation such as providing a
high quality product, a variety of products, bundled or bulk orders, and a special
characteristic in their delivery of the product. All of these tools are used to set the
Sealed Air 40
company apart from the industry and fit the special needs of the consumers. This is
important because the company will gain the customers who need over night deliveries
due to the fact that they have special orders to fill. Another example is Lexus car
dealers providing a higher quality vehicle in order to attract customers. Another tool
that Lexus car manufacturers have used to differentiate themselves is by making
consumers aware of the quality of their vehicles. Lexus has a brand image and
reputation of selling high quality vehicles, which attracts a special segment of
consumers who value quality in their vehicle. These high standards were accomplished
through the work done in research and development to make these cars, as well as the
marketing strategies that provided the information about the quality to the customers.
A good example of a company that strives to be the front runner in research and
development is Apple. They focus on research and development which in turn helps
spur their continued growth in new products. This strategy has differentiated them
from companies such as Microsoft, and has gained them an advantage in their industry.
Research and Development:
Research and development is not a very popular strategy in the packaging
industry. However, this has left an opening for a manufacturer, in the packaging
industry, to use R&D to distinguish itself from competitors. In the packaging industry
the company that puts the most emphasis into their research and development is
Sealed Air Corp. “With an annual R&D budget twice the industry average,” they
differentiate themselves from their competitors (www.sealedair.com). Differentiating
themselves has allowed them to expand in the food packaging industry. For example,
they have developed new ways to package perishable foods to make them last longer.
Along with the revenue that a new product brings to a company, it also brings
more brand imaging and recognition to the differentiated company. The larger the size
of the market a company can serve will result in more people hearing about their
products. This allows a company to be better prepared to meet customers’ needs. One
way this is possible is to have a variety of products or services. An example of this is
Sealed Air 41
since RIM has improved the BlackBerry line of products they have gained credibility in
consumers’ eyes.
Brand Image:
Brand imaging is the impression held by consumers on a certain brand. This is of
minimal importance in the packaging industry due to the majority of sales being in bulk.
Large corporations, such as UPS, who purchase packaging materials, are not very
concerned with the popularity of the brand of plastic air cushions or cardboard. This is
important to evaluate because it reflects on how much advertising and marketing would
be necessary to be effective in an industry. Since brand image is not that important,
neither will marketing nor advertising play a large role.
Product Appearance:
Product appearance deals with how consumers respond to viewing products.
Product appearance can be very important in the packaging industry because packaging
is usually tied to the appearance of that particular good. The customers of the
packaging industry will not be pleased if the packaging material does not flatter their
product. An example is the packaging of meat in meat markets. If hamburger meat is
covered in discolored plastic it will most likely cause the consumer to buy from
elsewhere. After the meat company figures out that this is the problem, they will be
forced to find another packaging supplier. This means that if product appearance is
better than another packaging company they will gain an advantage through this
differentiation.
Sealed Air 42
Quality:
Quality deals with how high of grade a product rates. There is room for all types
of quality in the packaging industry. The quality of the package is dependent on the
use of materials in the packaging. Some packaging is used just for shipping products,
but others are used for different needs. To illustrate, manufactures of foam coolers,
such as Koldtogo, must compete in quality to make sure they will keep the products
cold enough for their entire exposure to outside elements. If Koldtogo coolers do not
keep the product at a cold enough temperature, then the customer will be forced to
find another cooler supplier. On the other hand, some companies want manufacture
lesser quality items in order to produce a lower cost of good.
Delivery:
A company with a flexible delivery schedule will have a competitive advantage
over a company that delivers on company terms rather than consumers’ terms.
Delivery flexibility deals with having enough products in inventory to provide the
customer with the products at a consumer’s designated time. Many firms in the
packaging industry, such as Sealed Air, have factories spread throughout the world so
that they can be close to customers allowing them to have a quick delivery.
Conclusion:
Cost leadership is the most important strategy for creating a competitive
advantage in the packaging industry. Customers of the packaging industry require low
cost of supplies, along with expected standards of quality. Although cost leadership is
extremely important in the packaging industry, differentiation plays a key role as well.
The key to success is to differentiate while keeping a low cost. Many companies have
found areas to differentiate themselves in and have been very successful.
Sealed Air 43
Firm Competitive Advantage Analysis
Although there are numerous ways to characterize a firm’s business strategy,
they generally fall into two distinct, mutually exclusive categories; Cost leadership and
Differentiation. After examining the industry’s key success factors of profitability and
analyzing the business’ competitive strategy, we have concluded that the Sealed Air
Corporation follows a cost leadership business strategy. Now that we have defined
which category it falls into, we will now discuss how well Sealed Air follows its identified
business plan for success.
Economies of Scale:
Sealed Air, much like the rest of its competitors, produces nearly all of their
products through an advanced automated machinery process. Therefore, it is
imperative that firms in this industry invest heavily in their fixed assets in order to
compete.
As the table above indicates, Sealed Air has lagged behind in this regard. However, due
to advancements in technology, the new production assets are more efficient and
require less maintenance. This in turn lowers both operating expenses and the price
charged to consumers and therefore leads to higher profit margins for the firm.
Property, Plant & Equipment (in thousands)
2003 2004 2005 2006 2007
SEE $ 1,042,400 $ 1,008,600 $ 911,200 $ 970,100 $ 1,080,100
PTV $ 1,522,000 $ 1,445,000 $ 1,141,000 $ 1,093,000 $ 1,264,000
BMS $ 1,615,308 $ 1,687,001 $ 1,143,539 $ 1,175,959 $ 1,248,456
GEF $ 912,375 $ 880,682 $ 862,056 $ 940,949 $ 1,125,437
PKG $ 1,345,154 $ 1,345,154 $ 1,320,511 $ 1,252,291 $ 1,215,298
Sealed Air 44
Cost Control/ Input Costs:
Sealed Air has thus far performed on par with the industry when it comes to
control cost, which is apparent when you consider that the growth in operating
expenses has been steady the past 5 years. However, that might change with respect
to input costs. Petroleum, the key ingredient to manufacturing plastic polymers, has
been increasing at an abnormal rate. Chemical manufacturers, the main suppliers of
plastic polymers to Sealed Air, have increased their prices by 20% since June 1st. As the
graph below indicates, the price of petroleum resources has increased by 56% in just
2008 alone. With the out of control input costs, we could potentially see Sealed Air’s
expenses increase exponentially.
Source: Wikipedia.org
Aside from rising resource prices, Sealed Air does compensate for this rise in input costs
by limiting their expenditure on discretionary items, such as adverting and
selling/administrative expenses.
Sealed Air 45
Simpler Product Design:
Sealed Air, contrary to the rest of the industry, tends to utilize research and
development activities to create new and innovative products. Although this approach
does not coincide with the established cost leadership strategy, it does however tend to
offer many benefits. To be successful in any industry, all firms must invest in future
products. Sealed Air has definitely taken this into account when they decided to
increase their expenditures on R&D, nearly double of any other competitor in the
industry (Sealed Air Homepage).
Research and Development:
Sealed Air is the main research and development company in the packaging
industry. They pride themselves in finding the newest ways to package their
customers’ products. Last year Sealed Air spent 90.8 million dollars on research and
development. These costs not only included R&D of products but also the development
of customer service. This improvement has led to increased customer satisfaction,
which has helped Sealed Air gain an advantage in the industry. Another contribution of
Sealed Air’s research and development is to develop patents and trademarks. These
patents and trademarks include Bubble Wrap, Cryovac, Instapak, and Jiffy Mailer.
These products have assisted them in finding their role in the industry although
research and development is not considered an important factor of the packaging
industry. As the table below shows, even though Sealed Air is a leader in R&D in the
packaging and container industry, R&D is still a very small percentage of their sales.
Because of this, one can come to the conclusion that in packaging and container
industry R&D is not very important.
Sealed Air's R&D Percent of Sales
2003 2004 2005 2006 2007
1.95% 1.93% 1.86% 1.81% 1.95%
Sealed Air 46
Quality and Brand Imaging:
Sealed Air considers quality a way for them to differentiate themselves among
their competitors. The high quality of their products have gained them business
throughout the food industry. Many food companies around the world have chosen
Sealed Air because the way the product looks in their packaging and the quality of
freshness the food keeps. The quality of their product has positively influenced the
brand imaging of Sealed Air. Although brand imaging is not very important in the
packaging industry, Sealed Air holds a slight advantage. Another source of their
positive brand imaging is the trademarks they have on their products. A good example
of this is Bubble Wrap. The majority of our culture refers to small plastic air pockets as
Bubble Wrap. Since Sealed Air makes Bubble Wrap, people automatically think of
Sealed Air when they see any kind of sealed air pockets used for shipping. Quality and
brand imaging is a key factor in Sealed Airs attempt to differentiate from the industry.
Sealed Air's Marketing Cost / Sales
2003 2004 2005 2006 2007
16.21% 16.48% 15.81% 16.20% 16.13%
Furthermore, in references to quality and brand image, Sealed Air continues to
promote their ‘excellence approach’. For example, as SEE continues to expand, they do
so in manner that benefits their image globally. The following is a quote from SEE’s
footnotes of their 2008 10-k which proves that they continually increase their capital
expenditures with “investments in capacity expansion and in new technologies related
to the Company's centers of excellence approach as well as global manufacturing
strategy” (SEE 2008 10-K).
Sealed Air 47
Delivery:
Flexible delivery has been a key success factor for Sealed Air. More flexibility in
their delivery has allowed them to serve more customers throughout the world in a
timely fashion. The fact that they manufacture in over 50 countries and have 121
manufacturers allows them to be close to their customers. This is important because
this gives them a timing advantage against competitors who are not close to their
customers. If a customer in Europe needs packaging supplies sent over night then
there are 36 manufacturers dispersed throughout Europe to send them the supplies.
The flexibility in delivery that Sealed Air possesses has helped differentiate them from
their competitors.
Conclusion:
In summary, Sealed Air has gained a competitive advantage in both cost
leadership and differentiation. Although the main focus of this industry is cost
leadership, they have found areas to differentiate themselves from their competitors.
They have accomplished this through extensive research and development, high brand
imaging, dependable quality, and flexible delivery. Sealed Air has achieved several cost
leadership objectives by maintaining tight cost control, large economies of scale, high
investment in efficient production assets, and maintaining a simple product design. In
conclusion, we feel that Sealed Air gained and advantage through cost leadership and
differentiation, leading us to believe that they follow a mixed strategy.
Sealed Air 48
Accounting Analysis
Accounting analysis is used to “evaluate the degree to which a firm’s accounting
captures its underlying business reality” (Palepu & Healy book). An accurate accounting
analysis is imperative when properly valuing a company because it eliminates
distortions caused by inaccurate accounting numbers. There are six steps in performing
the accounting analysis that will insure a suitable analysis. First, the analyst must
identify key accounting policies based upon the industry and the firm’s specific business
strategy. Next, the analyst assesses the amount of flexibility that was used in the firms
accounting procedures. The third step is to identify how they used this flexibility and
what the benefits are from performing their accounting procedures this way. Fourth,
the analyst must evaluate how detailed and fair a company’s disclosures have been
reported. After that, red flags need to be located and examined. The last step is to
make the proper adjustments that have been incurred due to management’s decision
and accounting policies. This is important because of the flexibility given to the
managers in accounting can distort the numbers that are analyzed. Once they have
realized what numbers are incorrect then, the analyst can adjust the numbers
accordingly.
Key Accounting Policies
A company’s key success factors can add value by giving the firm an advantage
over its competitors. However, these factors can also be misrepresented by the
company to give the company a better picture for the stockholders. A company’s key
success factors help the firm decide which key accounting policies they are going to
use. As mentioned above, Sealed Air’s key success factors are cost leadership and
differentiation. These factors show where distortions are likely to exist. Some of the
accounting policies that could potentially distort the actual value of the firm by the way
they are recorded are: research and development, capital and operating leases, pension
liabilities, goodwill, and currency risk. The GAAP allows some flexibility in reporting
financials while only placing a minimum requirement on disclosure. This gives
Sealed Air 49
companies the opportunity to distort their financial statements. A company’s key
success factors and key accounting policies should be looked at and analyzed to see if a
company has distorted their financials.
Research and Development:
Research and Development is a key factor for many companies to gain a
competitive advantage. R&D has a large risk due to the chances that the research will
never result in anything or their competitor will cause their research to be useless or
obsolete. Due to the uncertainty of gain that R&D will produce, GAAP rules state that
R&D should be treated as an expense. The expensing of R&D causes expenses to be
overstated and net income to be understated. This will affect the balance sheet by
understating equity and assets. This affects some industries a great deal more than
others. An example of an industry that contains large R&D expenses is the
pharmaceutical industry. Their large expenses of R&D cause net income to appear
lower when compared to other industries.
On the other hand, the packaging industry on the whole does not expense very
much R&D. Sealed Air prides their company on being a leader in the R&D sector of the
packaging industry. On Sealed Air’s website they state that they have “annual R&D
budget twice the industry average” (Sealed Air 10K). As the table below confirms,
Sealed Air spends a huge sum more than their competitors on R&D in the past five
years alone. This is important because it will cause their expenses to be higher than
their competitors’ in the industry. Since R&D expenses will be higher, it will cause net
income to appear lower when compared to the industry (derived from net
income=revenue-expenses). When net income appears lower it may cause investors to
steer away from the company even though R&D has proven to benefit companies.
Sealed Air 50
(In millions) 2003 2004 2005 2006 2007
Sealed Air $ 69 $ 73.2 $ 75.8 $ 78.2 $ 90.8
Pactiv $ 32 $ 28 $ 33 $ 33 $ 34
Bemis $ 21.45 $ 21.14 $ 23.53 $ 25.02 $ 25.98
Packaging Co. of Amer.
$ 6.1 $ 6.1 $ 6.8 $ 6.9 $ 7.6
Sealed Air can confirm their R&D expenses by arguing that it will raise revenue
for them in future years. The problem with their argument is that it will only account for
products that are completely developed and sold. It does not consider the items that
are currently being developed. Some companies will attempt to adjust this problem by
capitalizing certain sectors of their developing R&D to intangible assets. They base this
capitalization on the progress they have made in their development of future assets.
Future assets from R&D can include patents, trademarks, product lines, and intangible
assets.
The information provided by the companies in the packaging industry about what
their R&D includes is very limited. A large part of these R&D expenses deal with finding
efficient production and delivery methods. Sealed Air has gone as far to include
“technical support for customers and facility occupancy” in their R&D (Sealed Air 10K).
This controversial call, to include these expenses in R&D when they used to be
expensed to marketing and administrative expenses, has resulted in a $12.6 million
increase in R&D expenses (Sealed Air 10K).
In conclusion, the fact that GAAP requires companies to expense R&D can cause
net income to be understated. Considering Sealed Air has the highest R&D expense in
the industry then, they also have the most understated net income in the industry.
Although potential investors will not like the low net income, Sealed Air has chosen R&D
to gain a competitive advantage on their industry.
Sealed Air 51
Operating and Capital Leases:
Capital leases act as an asset to the lessee, and shares the risks and benefits of
ownership. Operating leases, on the other hand, are treated like rent, where the lessee
only has the right to use the property. Differentiating between capital and operating
leases is important because operating leases can, in some instances, severely
understate liabilities and assets of a company. Understanding balance sheet items can
cause inaccurate decisions by investors. Capital and Operating leases are accounted for
differently. As said above, capital leases are treated like an asset, but also like a liability
because of the lease payments. They are also amortized over the economic life or asset
life, depending on the length of time on the lease. Operating leases are not recorded on
the balance sheet which helps to reduce liabilities the company may have. Also,
operating leases avoid such expenses as depreciation and interest, which are taken into
consideration in a capital lease. Having understated expenses leads to an overstated
net income, this in turn overstates equity.
Looking at the package and container industry, most companies use both types
of leases. However, operating leases are used most often; and when companies use
capital leases, they also use operating leases. Pactiv, Bemis Co. Inc. and Packaging
Corp. of America are some of the companies in the industry that use both capital and
operating leases. On the other hand, Greif Inc. and Sealed Air Corp. only use operating
leases. Sealed Air Corp. even states in their 10K that the majority of their leases are
operating leases.
Since Sealed Air Corp. only uses operating leases vs. capital leases, their asset
and/or liabilities are understated due to the fact that operating leases are not reported
on the balance sheet. But given that their leases only make up a minute portion of their
total liabilities, 3.67%, the company would not gain much by switching to capital leases
(Sealed Air 2007 10-k). Their liabilities would not be greatly affected and in conclusion
neither would their balance sheet.
Sealed Air 52
Pension Liabilities:
As identified as one of the Key Success Factors, cost leadership places a heavy
focus on keeping costs low so that those savings can be passed on to consumers, thus
making the firm more price competitive. Many firms often expense these costs instead
of capitalizing them in order to deflate liabilities and overstate both equity and price per
share. This tactic of failing to record this liability is often called “off balance-sheet
financing” (investopedia.com). Since pension liabilities and other retirement obligations
can become a substantial burden, it is important for companies to disclose not only the
amount of the pension liability but also the forecasted prospective expenses and the
manner in which they formulated those assumptions.
Sealed Air Corporation maintains what they call a “non-contributory thrift and
retirement savings plan” which they have outlined in their most recent annual report.
During the past three years, charges made to pension payments amounted to $30
million, $30.4 million, and $32.8 million in 2005, 2006, and 2007 respectively.
Management of Sealed Air have explicitly stated the methods for accounting of pensions
by declaring that “the principle assumptions concern the discount rate used to measure
future obligations, the expected future rate of return on plan assets, the expected rate
of future compensation increases and various other actuarial assumptions” (Sealed Air
2008 10-K). As the statement clarified, the main concern when estimating future
pension expense is the estimated discount rate.
Discount Rates for Pension Liabilities
2003 2004 2005 2006 2007
SEE 6.75% 6.00% 5.80% 5.50% 5.80%
GEF 6.00% 6.00% 5.50% 5.25% 5.88%
BMS 6.75% 6.25% 5.75% 5.50% 5.75%
PTV 6.75% 6.25% 5.70% 5.75% 6.39%
PKG 6.25% 6.00% 5.50% 5.75% 6.00%
Sealed Air 53
As the table above indicates, Sealed Air seems to strictly follow industry averages
when determining the appropriate discount rate for pension plan assets. It is important
to note that the industry is currently experiencing a downward trend in their discounts
rates. A possible explanation could be the added need for conservative accounting that
yields less aggressive estimates. However, Sealed Air briefly explains that projections
are updated annually “with respect to the company’s asset allocation, historical returns,
and the current economic environment” (Sealed Air 2008 10-K). It is important to note
that although there appears to be an industry-wide consensus over the appropriate
discount rate, there is a fundamental flaw with this figure. Most of these discount rates
are merely man-made assumptions based on uncertain future events; therefore giving
the managers of the firm a considerable amount of flexibility. Despite the fact that
Sealed Air uses an industry-level discount rate, it is their rate of compensation-increases
that is a cause for concern. The rate of compensation-increases is the expected growth
rate of future liability expenses in order to keep up with both inflation cost and potential
rises in the costs of medical care. Currently, Sealed Air only has a 3.5% rate of
compensation. Given that medical costs have nearly tripled within the past decade, we
assume that serious changes must be made in the way Sealed Air values the present
value of future pension liability expenses.
Overall, it appears through the amount of disclosure Sealed Air has presented in
their 10-K that the firm has made a consistent effort in identifying the costs of pension
liabilities. As mentioned earlier, the packaging and container industry follows a cost
leadership business strategy that must reduce costs wherever possible. In regards to
pension expenses, it would appear that the firm has not done a good job when it comes
to estimating future liabilities and would therefore leave a considerable amount of room
for possible distortion.
Sealed Air 54
Goodwill:
When a firm’s market value is higher than the fair value of net assets of the firm
the difference in price is attributed to an intangible asset called goodwill. The value of
goodwill is important to look at because it can be key to determining the acquisition
price of a firm. The value of goodwill is not predetermined by a company; it often stems
directly from the difference in the purchase price of a company and the book value of
the acquired firms assets. No firm in their right mind would be willing to state that it
purely overpaid for an acquisition so the variation in market price to book value is
chalked up to goodwill. Once the purchasing firm adds the difference in values to the
books, the initial value of goodwill has been created. However, the value of goodwill on
the financial statements is not the same year to year. Intangible assets are subject to
deprecation and impairment.
Firms carrying goodwill on their books are required to test it annually for
impairment. Impairment results from having a market value less than the carrying value
of the asset. When impairment occurs, assets must be written down to market value on
the financial statements. If impairment of the asset has occurred then the impaired
value is subject to a write down and expensed on the income statement. In previous
years goodwill was depreciated or amortized, but after a change in the generally
accepted accounting principles in 2002 goodwill is now only tested for impairment and
is no longer allowed to be amortized. If impairment test are done correctly and
accurately then benefits arise because over exaggerated asset values decrease giving
analyst a more realistic view of true asset value of the firm. However, GAAP does allow
for management to make judgment calls when it comes to the impairment of intangible
assets. Managers may face the challenge of meeting expectations and may not write
down the proper amount on assets, such as goodwill, leaving financial statements
overvalued. Industry standards are significant in deeming if a firm is on par in
valuations of goodwill since companies are not mandated by GAAP to disclose what
they determine as fair market value of goodwill. Industry benchmarks therefore will
help us in our accounting analysis of the goodwill of Sealed Air.
Sealed Air 55
GOODWILL 2007 2006 2005 2004 2003 2002
Sealed Air 1969.7 1957.7 1908.8 1918 1939.5 1926.2
Bemis 642.5 603.6 581.4 442 450.6 448
Pactiv 1123 525 527 462 643 612
Greif 493.2 286.5 236.7 237.8 252.3 232.5
Package Corp. 3716.3 3720 3418.7 3691 2286 1789
The first table above compares the amount of goodwill reported on Sealed Air,
Bemis, Pactiv, Greif, and Package Corp.’s 10-ks for the past six years. When analyzing
the packaging industry, Sealed Air continues to be above average in their reporting of
goodwill. Although Sealed Air does not have the highest amount of goodwill reported, it
is enough to raise concern for many analysts. The large amount of goodwill compared
to other net assets could be causing the firm to be overvalued severely. This is in
reference to the second stated table above and will be talked about in further detail in
the undo accounting section. Furthermore, another issue at hand is there is lack of
stable decline in the amount of goodwill. The following graph shows that although there
is not a steady decline in the balance of goodwill assets, the volatility in Sealed Air’s
goodwill value is less volatile than all of its competitors. Sealed Air’s goodwill varies by
1-3% over the past six years; where as other competitors have experienced over 50%
Sealed Air's Goodwill as a Percent of Total Assets
Year 2002 2003 2004 2005 2006 2007
Percent of Total Assets* 46.31 41.23 39.51 39.23 38.99 36.22*Before Impairment
Sealed Air 56
increases in goodwill. The Y-axis represents the value assigned to goodwill on each
company’s 10-k, and the X-axis represents the year that the assets were reported in.
Our analysis of this leads us to the conclusion that management may not be
correctly valuing or impairing the amount of goodwill on its financials due to man-made
error or management manipulation. We are concerned that this could lead to overstated
asset values on the balance sheet and understated expenses on the income statement.
Since the disclosure of fair market value of goodwill is not required by the SEC or GAAP,
it is difficult to determine what the true value of goodwill should be. By conventional
wisdom, one would think that if goodwill is being correctly impaired (and without large
Sealed Air 57
acquisitions of other firms) then the value of goodwill should be declining over time;
however that does not seem to be the case for Sealed Air or its competitors. Due to the
nature of goodwill’s flexibility and the ability to be easily exploited by managers is
consistent with our inconsistent findings of the accountability of Sealed Airs goodwill
asset value.
Currency Risk:
For international corporations such as Sealed Air, it is important for such firms to
address the market risk of currency when making sales in foreign countries. According
to Sealed Air’s most recent annual report $2.533 billion was made in sales overseas,
which comprises 54.5% of total net sales for all of 2007. Given that a majority of their
income comes from abroad, it would be imperative for firms to discuss how they
account for such transactions. It is well known that firms that compete overseas face a
tremendous risk when selling their products in foreign markets. Multinational
corporations consider currency risk not only when it comes to sales but when it comes
to their international production facilities. Aside from owning manufacturing factories in
foreign countries, they also do a heavy amount of outsourcing as well, about $180.7
million in 2007 to be exact. Since most of Sealed Air’s business is performed abroad, it
would be essential for the company to have a business strategy when it comes to the
volatile currency market.
According to Sealed Air’s 10-K, the company invests in derivative financial
instruments to offset some of the currency risk. Such financial derivatives include
foreign currency forward contracts to lock-in fixed exchange rates, which help prevent
the firm from experiencing any liquidity problems when conducting foreign transactions.
Another hedging activity they perform are foreign exchange options that help diversify
away potential foreign interest rate fluctuations when conducting business overseas.
These options become very useful since Seal Air currently has $49.2 million in
outstanding debt denominated in foreign currency. Aside from using options and
Sealed Air 58
forwarding contracts, the company also uses “currency swaps, interest rate swaps,
caps, collars, and U.S. treasury lock agreements” (Sealed Air 2007 10-K).
Now that we know of the numerous derivative tools at their disposal, it is now
time to discuss how management accounts for such assets. Sealed Air, as does nearly
every other corporation, records their hedging and derivative assets at fair market value
as permitted by rules and conventions set by GAAP. Currently Sealed Air carries and
aggregate of $385.1 million in derivative securities and contracts aimed at currency
risks that are set to expire in October 2008. When estimating the appropriate value for
purchasing such assets, Sealed Air states that “the company identifies the specific
financial risk it faces, the appropriate hedging instrument to use to reduce the risk, and
the correlation between the financial risk and the hedging instruments. The company
also uses purchase orders and historical data as the basis for determining the
anticipated values of the transactions to be hedged” (Sealed Air 2007 10-K). Given the
current economic environment, it is important to note that the currency exchanges have
tremendously benefited the company. Due a slowing domestic economy and a weak
U.S. dollar, Sealed Air were able of overcompensate losses in domestic sales by
favorable exchange rates. For instance, out of the 7.5% company growth, 4.1% of that
was largely due to foreign currency translations, thus making currency risk a key
success factor for this firm.
Accounting Flexibility
Flexibility in accounting refers to the amount of room a manager has to show the
true value of their company in their financial statements. The information contained in
these statements should be appropriate, reliable, and consistent. However, the GAAP
allows the managers some flexibility for the financial statements, which is designed to
give managers the opportunity to portray their firm’s financial information in a more
informative way. The down side is that this flexibility can lead to a company’s financials
being distorted and misrepresented to make the firm look more appealing to likely
investors. Below, we will identify the flexibility of the key accounting policies, as they
Sealed Air 59
are relevant to the key success factors, of Sealed Air Corp. and the packaging and
container industry.
Research and Development:
GAAP strictly states that research and development should be expensed despite
the critical role that it performs as a key success factor for companies. This regulation
results in companies overvaluing their expenses. When companies overvalue their
expenses then they will undervalue their net income. Another regulation is that the R&D
must be expensed at the time it occurs. This is important because it places the
expenses at a time when a company is not receiving any revenue from their R&D
benefits. To help solve this problem a company can gradually capitalize their R&D to
intangible assets. The flexibility of capitalizing R&D is only performed by Pactiv in the
packaging industry due to the small amount of funds that are expensed to R&D in the
industry. Pactiv capitalizes in-process research and development at a fair value as an
indefinite-lived intangible asset at the acquisition date (Pactiv 10K).
The small amount of flexibility in the accounting of R&D expenses within the
packaging industry is what items are included as R&D expenses. An example of this is
how Sealed Air has decided to include technical customer support and facility occupancy
cost in their R&D expenses in 2007 (Sealed Air 10K). These costs were previously
stated in the marketing and administrative expenses. Sealed Air did this because an
increase in R&D is better accepted by analysts than a jump in marketing and
administrative expenses. By removing these costs from their marketing and
administrative expenses it allowed these expenses to remain at 16% of their total net
sales (Sealed Air 10K).
Disclosure of the companies R&D expenses is somewhat limited amongst Sealed
Air’s competitors in the packaging industry. The only details about what some of the
R&D expenses were (for 2007), for Sealed Air, is that they included, technical support
and facility occupancy cost (Sealed Air 10K). Pactiv only goes as far as to say that 30%
of their R&D is devoted to reducing costs and distribution efficiency (Pactiv 10K). While
Sealed Air 60
Bemis is the most disclosed company by breaking the R&D expenses into flexible
packaging and pressure sensitive materials (Bemis 10K), an analyst can conclude that
the packaging industry has a low disclosure when it comes to R&D expenses.
In conclusion, there is limited flexibility of recording R&D expenses in the
packaging industry. Areas of accounting that lack flexibility such as R&D leave us with
little knowledge about the motivation of the managers and the company’s personal
economic standpoint. This concludes that the flexibility of R&D expenses is not an
important factor to analyze when valuing a firm in the packaging industry.
Operating and Capital Leases:
A company can choose between two different types of leases. A capital lease,
which as discussed above, is treated like ownership. With a capital lease, the company
assumes ownership and all the risk associated with that. These risks would include such
things as taxes and payments. But on the plus side, the company gains certain benefits
related with ownership, such as deduction of interest expenses and depreciation. A
capital lease is recorded as an asset and liability (lease payments) on the balance sheet.
The other type of lease is an operating lease, which is treated like rent. They are
recorded on the income statement as operating expenses but are kept off the
company’s balance sheet. With these expenses not being recorded on the balance
sheet, the company’s assets and liabilities can be somewhat understated. This, in turn,
causes the firm’s expenses to be understated, their net income to be overstated, and
the company’s retained earnings to be overstated as well.
In the case of Sealed Air Corp., their leases do not account for enough of their
liabilities to matter if one type of lease is used over the other. Sealed Air’s leases
account for 7.47% of long term liabilities which is not a substantial amount compared
to total liabilities. Sealed Air Corp. has chosen to use operating leases which, if they
were to be capitalized would only affect their balance sheet ever so slightly. Since there
would be only a slight change to their balance sheet depending on the type of leases
Sealed Air 61
used, Sealed Air Corp. has all the flexibility it wants when deciding on which type of
lease to use. 7.47%
Pension Plans:
Pension plans are recognized as a key accounting policy in the packaging
industry. Similar to other accounting policies such as capital leases and goodwill, there
can be significant flexibility with how a company estimates their pension plans. The
majority of this flexibility stems from the discount rate a firm chooses. Ultimately, the
discount rate is an estimation used to discount future payments to the present value.
An increase in the discount rate leads to a decrease in these payments, and vice versa.
The discount rate is also related to a firm’s net income. For example, a reduction in the
rate would cause the firm’s expenses to increase. Naturally, this leads to lower net
income and the firm’s liabilities would also be overstated.
However, managers do not enjoy the same level of flexibility that they once did
regarding pension plans. The FASB recently issued a new mandatory policy which
requires a company to recognize the overfunded or underfunded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or liability in
its statement of financial position and to recognize changes in that funded status in the
year in which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization (FASB, SFAS 158).
This is important for a variety of reasons. Prior to this policy, accounting standards did
not require firms to fully recognize the financial impact of certain events affecting the
plan’s funded status when they occurred. This allowed companies to delay the
recognition of economic events that affected the cost of the pension plan’s benefits to
their employees. Companies were only required to record the prepaid pension costs;
meaning they only accounted for the actual cash being deposited into the pension fund.
This severely understated the liabilities for a large percentage of firms.
Sealed Air 62
The following table summarizes the incremental effects of SFAS No. 158
adoption on the individual line items in Sealed Air’s consolidated balance sheet at
December 31, 2006 (Sealed Air 10-K, 2007):
(Amounts in millions) Pre-SFAS No. 158
Adoption SFAS No. 158 Adjustment
Post SFAS No. 158 Adoption
Assets
Deferred Tax Assets 152.8 22.6 175.4
Other Assets 224.4 -62.8 161.6
Liabilities
Other Current Liabilities 573.9 2.3 576.2
Other Liabilities 112.5 13.3 125.8
Shareholders' Equity
Minimum Pension Liability, net of tax -4.4 4.4 N/A
Unamortized Pension Items, net of tax N/A -60.2 -60.2
Since the policy’s implementation, users of a firm’s financial statements can more
easily evaluate a company’s financial position. “This Statement improves financial
reporting because the information reported by a sponsoring employer in its financial
statements is more complete, timely, and, therefore, more representationally faithful
(FASB, SFAS 158).” Liabilities are significantly larger because firms are now required to
account for both the actual cash deposited and the accrual of necessary funds that will
satisfy the workers pension plans. Companies are forced to report the increase in
liabilities on the balance sheet rather than disguising them in the footnotes of the
financial statements. The final section of the policy also states that companies must
disclose any additional information (in the notes to financial statements) regarding
effects on net periodic benefit cost for the next fiscal year that arise from delayed
recognition from gains/losses or prior service costs or credits.
Discount rates within the packaging industry are fairly similar. Discount rates
have generally decreased during the past five years. The average rate for Sealed Air
and their competitors has gone from 6.5% in 2003 to 5.964% in 2007. For example,
Sealed Air’s discount rate has steadily decreased from 2003-2006, from 6.75% to 5.5%,
Sealed Air 63
respectively (before finally rebounding to 5.8% in 2007). Sealed Air’s discount rate is
slightly lower than the industry average which causes their expenses to be a shade
higher (forcing net income slightly down).
Ultimately, the flexibility of pension plans is an important factor for any firm. The
industry has experienced some dramatic change in recent years with the addition of
FASB’s new policy. Firms can expect widespread impact throughout their financial
statements by adjusting the discount rate they use.
Goodwill:
Companies carrying goodwill on their books are granted a large amount of
flexibility in reported values of goodwill due to the structure created by GAAP. In 2002
GAAP changed the rules for the way goodwill is reported on the balance sheet. In
previous years goodwill was subject to amortization like any other asset. However,
GAAP changed the rules in regards to goodwill saying that it was no longer allowed to
be amortized but now must be tested for impairment annually. GAAP changed this rule
in hopes that companies would take more aggressive steps in writing down goodwill’s
value on financial statements, thus creating less inflated asset, equity, and net income
values. However, after a six year respective look at Sealed Air and its competitors we
have not found data to support the type of write off activity that GAAP was hoping to
accomplish by the change in accounting standards. Although annual testing for
impairment is mandated by GAAP, managers are still allowed a great deal of discretion
in the impairment test procedure, “it is possible for the allocation process to be
manipulated for the purpose of avoiding flunking the impairment test. As managements’
attempt to avoid these charge-offs, more accounting shenanigans will undoubtedly
result” (investopedia.com).
The allocation process and the determined amount of fair market value (used to
determine impairment) are not required to be reported on financial statements. The
large amount of flexibility in the accounting procedures for goodwill can be verified by
these nondisclosure policies. Policies such as these easily allow companies to
Sealed Air 64
manipulate and hide things from investors. Managers are often given compensation or
incentives to boost higher earnings. One way managers can achieve higher earnings is
to avoid taking the write offs of goodwill and expensing it through the income
statement. Managers’ ability to delay expensing these over inflated assets creates
overstated equity and net income.
In reference to Sealed Air’s goodwill impairment, it is stated in the 10-k that “The
Company completed its annual testing for impairment for 2006, 2005 and 2004 during
the fourth quarter of each year and determined that no impairment charge was
necessary on a reporting unit basis in any of the periods.” (Sealed Air’s 2007 10-k).
From analysts prospective, one could be concerned that Sealed Air is finding no room
for impairment, and could be leading to over estimated firm value. Furthermore, there
seems to be a lack of disclosure as to what quantitative measures are taken when
comparing goodwill assets to fair market value of goodwill. The only findings that could
rival these concerns is the fact that Sealed Air has had a constant reported value of
goodwill over the past six years. Constant reporting value could be positive for Sealed
Air, but we feel that it does not overshadow the lack of impairment write offs or the
lack of disclosure in the 10-k. Overall, goodwill’s reporting nature allows there to be a
large amount of flexibility and tendency to be manipulated as seen in Sealed Air’s
financial records.
Currency:
In regards to currency exchanges, there is very little room for accounting
flexibility. Potential manipulation by management is very remote given that most
overseas transactions are all recorded under GAAP principles and are monitored
through the SEC, meaning that all sales are translated into domestic currency terms and
are verifiable through the company’s bank statements. Although currency market
securities and derivatives are booked at fair market value, this technique still follows the
proscribed method dictated by GAAP when recording such an asset. Not only are there
transactions through their income statements, but the fact that exchanges rates and
Sealed Air 65
foreign interest rates are all publicly available information that can verify the company’s
estimates. Therefore, we can reasonably assume that Sealed Air follows stringent
guidelines in terms of foreign currency exchanges.
Evaluate Actual Accounting Strategy
Actual accounting strategies used by companies are important to review because
it will help assess the disclosure and choice of a firm’s specific accounting policies.
There are two types of disclosure, high and low. High disclosure means that firms
thoroughly discuss relevant information helping investors make accurate decisions of
firm value. High disclosure goes above and beyond the requirements of the Securities
and Exchange Commission and the standards of generally accepted accounting policies.
Firms that have a high amount of disclosure tend to limit the extent of the use of
flexibility in accounting procedures. Low disclosure firms barely meet SEC and GAAP
standards. Low disclosure can lead to misinterpretations of earnings, asset values, and
liabilities. Firms that maximize the allowance of flexibility in accounting practices are
generally considered to have low disclosure. There are a few main components that
help determine if a company’s accounting strategy is high or low disclosure such as if a
company is using segment reporting, and the levels of dis-aggregation. Another
important key to actual accounting strategies is determining if a firm is practicing
aggressive or conservative accounting procedures. Aggressive accounting procedures
lead to higher earnings, and conservative accounting procedures lead to low earnings.
Through evaluating these two basic dimensions investors should be able to accurately
evaluate a firm’s actual accounting strategy.
Research and Development:
Research and development is not emphasized very heavily in the packaging
industry. R&D reporting lacks disclosure and flexibility. The lack of flexibility is due to
the strict regulations enforced by GAAP. These regulations state that a company must
expense their R&D, when it could be argued that R&D is an asset. Expensing R&D leads
to overvalued expenses and an undervalued net income. This inaccuracy results as a
Sealed Air 66
decrease in the credibility of the numbers reported on the financial statements of a
company. As previously discussed, the only way to partially fix this problem is to
capitalize the developing products to assets over the progress of the R&D. With this
said, Pactiv is the only company who has slightly participated in this capitalization of
R&D in the packaging industry (Pactiv 10K). This shows us that generally in the
packaging industry the firm’s expenses will be overvalued and this will cause their net
income to be undervalued.
As previously stated, R&D expenses have a very low amount of disclosure in the
packaging industry. Greif packaging does not even include an actual amount that they
spend on R&D. They state that “research and development projects are important to
the Company’s continued growth, the amount expended in any year is not material in
relation to the results of operations of the company” (Greif 10K). This is all that was
included in Greif’s 10K pertaining to R&D information. This is a prime example of how
the packaging industry has a low level of disclosure. This is important because it
reduces the amount of economic information one can pull from their financial
statements. Packaging Corporation of America is another one of Sealed Air’s
competitors that has a small amount of information disclosed about their R&D. They
only provide us with the amount of R&D expenses that were reported for 2007
(Packaging Corp. of America 10K). It is normal for little or no description of the specific
details or segments of the R&D to be provided in the packaging industry.
In conclusion, the small amount of flexibility due to GAAP regulations and low
disclosure in the industry has lead to a standard practice amongst the packaging
industry. This also makes it difficult to tell from R&D accounting practices whether a
company is aggressive or conservative. The only aggressive accounting tactic that
Sealed Air could use is to capitalize some of their developing products to assets, but
they do not. If they did this it would appear to make their assets larger. Considering
they could boost the appearance of their assets and they are not leads us to believe
that they are slightly conservative in the recording of their R&D.
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Operating and Capital Leases:
As discussed above, there are two kinds of leases and the way those leases are
reported on a company’s financial statements are different. A capital lease is treated
like an asset and liability and therefore is recorded on the balance sheet. Conversely, an
operating lease is treated like rent and kept off the balance sheet. In the packaging and
container industry, both types of leases are used, but operating leases are the more
common of the two. This allows companies to avoid the risk associated with capital
leases, which understates assets and liabilities. This would suggest an aggressive
accounting strategy on the company’s part. However, since capitalizing a lease for
Sealed Air Corp. would have little effect on the company’s balance sheet because leases
are a small percentage of their total liabilities, then we conclude that Sealed Air Corp.
does not have an aggressive accounting strategy for leases.
The industry as a whole uses operating leases over capital leases. If a company
in the industry chose to only use capital leases, then just by looking at the surface and
comparing them to the other companies in the industry, they would not add up. To stay
somewhat competitive in this industry it is key that the company uses operating leases.
All of the companies that we looked at, including Sealed Air Corp., gave charts that
explained how much was owed for operating and capital leases, their payments for the
next 5 years and a group sum after that. Most companies, however, did not give a
discount rate for the loans.
As in the case of Sealed Air Corp. we have come to the conclusion that their
discount rate is .7. We figured that their leases were for 15 years. For that length of
time, the only discount rate that would average out was .7.
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Pension Plans:
Since GAAP regulations provide firms with some flexibility concerning the
discount rate used on pension plans, it is important to examine the level of disclosure
and disaggregation in this area. Investors seek information that shows how each
company within the industry came up with their rates. As previously stated, most of
these discount rates are purely assumptions based on uncertain future events. This
gives managers a significant amount of flexibility in their level of disclosure. Since all of
Sealed Air’s competitors have some form of a pension plan, it is important to examine
each firm’s disclosure approach relative to the packaging industry.
Generally, it appears that the industry is leaning toward defined contribution
plans rather than defined benefit plans. However, firms still tend to differ with their
exact methods. For example, Bemis states that “our U.S. defined benefit plans were
amended for approximately two-thirds of the participant population. For those
employees impacted, future pension benefits were replaced with a defined benefit
contribution plan” (Bemis 10-K, 2007). On the other hand, Sealed Air uses a “non-
contributory thrift and retirement savings plan” which they have outlined in their most
recent annual report. “The contributory thrift and retirement savings plan generally
provides for Company contributions in cash based upon the amount contributed to the
plan by the participants. Company contributions to or provisions for its profit-sharing
plan and thrift and retirement savings plan are charged to operations” (Sealed Air 10-K,
2007). This could perhaps be used to explain why Sealed Air uses a slightly lower
discount rate than their competitors.
Sealed Air’s discount rate has been declining over the past five years and was
slightly below the industry average in 2007. This suggests they have used a
conservative accounting structure, thus reporting slightly higher expenses and a lower
net income than their competitors. Generally, the packaging industry seems to have a
moderate level of disclosure. Other firms break down the pension costs into sections
such as service costs, interest costs, and employee contributions. However, Sealed Air
is limited in their explanation of how they formulated their discount rate. Factors such
Sealed Air 69
as asset allocation, historical returns, and current economic environment, are all
revisited on an annual basis to adjust the rate.
Sealed Air still provides an adequate amount of data supporting their pension
plan expenses. The following table shows the components of the Company's net
periodic benefit cost for the three years ended December 31, 2007, for its U.S. pension
plans charged to operations (Sealed Air 10-K, 2007):
(Amounts in millions) 2007 2006 2005 Components of net periodic benefit cost
Service Cost 1.4 1.2 1.2 Interest Cost 2.5 2.1 1.9
Expected return on plan assets -2.8 -2.6 -2.4 Amortization of prior service cost 0.7 0.7 0.7 Amortization of net actuarial loss 1.1 0.9 0.7
Net periodic pension cost 2.9 2.3 2.1
Sealed Air also provides data for estimated future benefit payments, which
reflect expected future service, for the next five years. Overall, the industry has a
moderate rate of disclosure and disaggregation with regards to pension plans. Sealed
Air is generally on par with other firms in the industry.
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Segment 2003 2004 2005 2006 2007Food Packaging N/A 538.4 549.8 386.3 388Protective Packaging N/A 1365.7 1386 1270.9 1275.2Food Solutions N/A 0 0 154.1 149.7Other N/A 0 0 145.8 156.8Total N/A 1904.1 1935.8 1957.1 1969.7
Goodwill Allocation
Goodwill:
In terms of goodwill, Sealed Air’s disclosure on its financial statements is moderate. Sealed Air provides investors with detailed segmented reporting in the allocation of goodwill. For example, the following is a table taken from the 2007 10-k from Sealed Air that shows the segmented allocation of goodwill in accordance of SFAS No. 142.
The table above allows investors to see which segment of the firm the goodwill is
being allocated to, i.e. food packaging or protective packaging. Segmented disclosure
such as this is a characteristic of high disclosure. Although Sealed Air does provide this
segmented allocation table of goodwill, it does not thoroughly explain how the goodwill
was acquired or the quantitative analysis of how these values were reached. This lack
of information could lead to some ambiguity among potential or current investors.
Furthermore, in assessing the level of disclosure of Sealed Air’s financial
statements investors are faced with insufficient information regarding the impairment of
goodwill over the past four years. The firm does not disclose values or procedures for
the impairment testing of goodwill. GAAP states that if the book value of goodwill
exceeds the fair market value of goodwill then the excess amount is considered the
impaired amount and should be expensed out through the income statement. In Sealed
Air’s financials all that is stated in the protocol for good will is the following, “The
Company derives an estimate of fair values for the Company as a whole and for each of
the Company’s reporting units using an income approach, which uses forecasted
earnings and cash flows, and a market approach, which uses comparisons to other
businesses.” (2007 Sealed Air 10-K) Investors may feel that better information such as
which business the 10-K is referencing, or the values or the aforementioned cash flows
Sealed Air 71
could be extremely beneficial in the degree of disclosure. In conclusion of assessing the
level of disclosure for Sealed Air, we feel that since both characteristics of high and low
disclosure can be seen in the financial statements that the degree of disclosure seems
to be moderate.
In addition to assessing the level of disclosure in evaluating the actual
accounting strategies it is important to consider the type of accounting polices enacted
in a firm. For example, a firm may exercise a conservative type of policy. Conservative
accounting is normally characterized by policies leading to lower earnings. An example
of something a firm could do to practice conservative accounting would be to
continuously state assets at historical cost. In contrast to conservative accounting
practices there are also aggressive accounting policies. Aggressive accounting policies
generally have the tendency to inflate assets and delay expenses leading to higher
earnings. In reference to Sealed Air’s goodwill accounting, we feel that the policies
exercised in the past six years have been very aggressive.
To illustrate this analysis the following is a quote from Sealed Air’s 2007 10-K
relating to the impairment of goodwill. “The Company completed its annual testing for
impairment for 2006, 2005 and 2004 during the fourth quarter of each year and
determined that no impairment charge was necessary on a reporting unit basis in any
of the periods” (Sealed Air’s 2007 10-K) Since no impairment charges were expensed
during any of these years one could be led to the conclusion that income could be
overstated if expenses really were understated due to the lack of impairment write offs.
The final analysis tool in evaluating the actual accounting strategy of a company
is to compare the level of disclosure and accounting policies to other firms in the same
industry. Sealed Air’s competitors are Bemis, Pactiv, Package Corporation, and Greif. In
industry standards, the degree of disclosure is on par with Sealed Air’s competition. All
of the competitive firms allocate the segmentation of goodwill just as Sealed Air’s does.
Moreover, the aforementioned competitors take an aggressive stance on accounting
policies. BMS, PCT, GRF, and PKG all do not impair any amount of goodwill over the
past four years according to their most recent 10-K’s. We feel that Sealed Air is on par
Sealed Air 72
with the type of actual accounting strategies implemented in the packaging industry.
Finally, we believe that Sealed Air will not deviate from their accounting strategy until
the rest of the industry takes a more conservative stance as well.
Currency:
As stated earlier, an overwhelmingly majority of Sealed Air’s business is
conducted overseas. Despite the fact that these transactions comprise a large share of
the company’s operations, there is relatively little room for management to distort
foreign income figures. Many of the estimates and assumptions made by management
are publicly available information, such as currency exchange rates, foreign interest
rates, and prices for typically currency hedging derivatives. In regards to disclosure,
Sealed Air has done a fairly excellent job of providing information pertaining to foreign
operations, both fiscally and qualitatively. Not only have they stated the amortization of
foreign outstanding debt and net sales, but they have also informed shareholders of the
current assets overseas and the manner in which they were financed. Nearly all of their
sales made abroad are channeled through currency financial instruments such as
options, forward contracts, caps, U.S. lock agreements, interest rate swaps, collars and
currency swaps. Given the level of high disclosure and the simple accounting principles
provided by GAAP, we can reasonably conclude that Sealed Air follows a relatively
conservative accounting measure when it comes to foreign currency transactions.
Quality of Disclosure
The principles stated by GAAP are a bottom barrier to the amount and kind of
information companies must disclose in their statements. They also state that a
company must back up ambiguous quantitative data with qualitative analysis. GAAP will
allow the companies to provide as much information as they want. Firms can decide to
provide more information than required to allow a better evaluation of the company. If
a firm discloses the bare minimum that GAAP requires than it becomes more difficult to
find the value of a firm and may be a warning sign of poor information. Evaluating a
Sealed Air 73
company’s disclosure can help to value the company, along with aiding in the spotting
of red flags.
Research and Development:
Research and development expenses are poorly disclosed within the packaging
industry. Some of the firms such as Greif packaging have decided not to even give a
numerical amount for their R&D. Instead, they state that although “research and
development projects are important to the Company’s continued growth, the amount
expended in any year is not material in relation to the results of operations of the
company” (Greif 10K). This means that the amount spent on Greif’s R&D is so small
that they think the information on it would be useless in looking at the big picture of
their company.
While Greif has extremely low disclosure about their R&D, there are no
companies in the packaging industry who have a high disclosure of R&D. The most
disclosure found in the industry is from Bemis, where they break their R&D into flexible
packaging and pressure sensitive materials. But, this is still a very minimal amount of
disclosure.
Sealed Air has an average amount of disclosure in comparison with the industry.
They simply state the amount of R&D for the year (90.8 million), and what expenses
were added from the previous year. As previously stated, Sealed Air prides their
company on spending a large amount of R&D compared to their competitors, but they
poorly explain what their R&D entitles within their 10K. The poor amount of disclosure
within the industry, and specifically Sealed Air, makes their R&D information a weak
basis of evaluation.
Sealed Air 74
Quality of Disclosure
Research & Development
Pension Plans
Goodwill Currency Leases
Sealed Air Low Moderate Low Moderate High
Packaging Industry
Low Moderate Low Moderate High
*Packaging Industry: Greif, Pactiv, Sealed Air, Bemis, & Packaging Co. of America
Operating and Capital Leases:
Sealed Air Corp. has an average disclosure rate compared with the industry. The
company gave the information needed on their operating leases, including what they
were for, how much they were for, and the payments for the next 5 years (broken
down, with a total number after that). The only thing that was not provided was the
discount rate. But all of the other companies that we looked at did not give this
information either. So, like stated above, Sealed Air has an average disclosure rate.
Therefore, we conclude that the information about Sealed Air Corp. leases is valid and
useful, even without the discount rate.
Pensions:
Sealed Air’s level of qualitative disclosure for pensions is consistent with their
competitors in the industry. Overall, Sealed Air’s competitors did a fairly good job in
discussing the different methods used to form their estimations. However, other firms
disclosed more information regarding how they estimated their discount rates and the
specific factors they used as criteria. These companies also did a slightly better job of
disclosing how much they expect the pension plans to grow over the next year. This
information can be used to estimate the future expenditures over future periods in time,
and determine if firms are properly accounting for future growth in the costs. The
overall disclosure provided by Sealed Air is sufficient, but perhaps they could have
included some more specific discount rate data.
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Goodwill:
The main elements in the quality of disclosure are the transparency of
information, and the decision usefulness stated in the financial reports of a company.
The quality of disclosure of goodwill in Sealed Air’s financial reports is poor. For
example, in note 20 of the 2007 10-K referencing acquisitions it is stated that Sealed Air
purchased Nelipak Holdings for $41.2 million, net of cash, and said that the cost of this
acquisition was, “not material to the Company’s consolidated financial statements”
(Sealed Air’s 2007 10-K). However, most investors would consider an acquisition of this
size to the relative size of the acquiring firm definitely material enough to be stated on
the consolidated financial statements. $25.7 million dollars of this acquisition was
credited to goodwill. By omitting the acquisition of this firm to the consolidated financial
statements Sealed Air is leaving out the fact that they overpaid extensively for Nelipak
Holdings. In addition to the omission of the aforementioned acquisition on the
consolidated financial statements, another issue in the quality of disclosure is the
derived ‘estimate’ used to value the company as whole in regards to the fair market
value of goodwill used in the testing of goodwill impairment. It is actions such as these
where the quality of disclosure is distorted and transparency of the financial statements
is weak. Poor disclosure of goodwill and acquisitions can lead to misinterpretation
among investors and convey no usefulness if items such as $25.7 allocations to goodwill
are not presented on the consolidated financial reports.
Currency:
Sealed Air has a moderate amount of disclosure for currency. Their primary
purpose is “to manage the potential changes in value associated with the amounts
receivable or payable on transactions denominated in foreign currencies” (Sealed Air
10-K). They explain how they are affected by market risk and the fluctuations in foreign
currency exchange rates. The maturity of euro notes is accounted for in the financial
notes, and a breakdown of the cash and interest payable for retiring these debts is also
Sealed Air 76
provided. Sealed Air also does a good job in disclosing the estimated fair values of
foreign currency forward contracts. These were designated as cash flow hedges and
have original maturities of less than one year.
Quantitative Analysis
The quantitative accounting disclosures are intended for the managers to more
effectively communicate the company’s financial statements’ numbers. These
statements can give outsiders crucial information regarding the value of the company
along with the accounting policies they have in place. GAAP allows managers to have
some flexibility when reporting the company’s finances. The flexibility permits the
managers to choose how much information is disclosed and how the format in which it
is disclosed. This flexibility is meant to give managers the opportunity to better portray
the performance of their companies using their inside knowledge about the company.
However, most managers today choose to use their flexibility to help make their
company better looking for outsiders, such as shareholders and investors. Since
managers have numerous incentives to distort the company’s actual performance, it is
important for investors and shareholders alike to understand accounting techniques and
how they can be used to decipher more information about the company that is not
given. With diagnostic ratios, an analyst can potentially better determine the true value
of a company and potentially be able to spot red flags in the policies that would show
signs of number manipulations.
There are two key quantitative measures in order to determine if a company is
accurately stating their business activities or distorting them. The first measure is to
look at the sales manipulation diagnostics. These ratios involve dividing net sales by
different factors, cash from sales, accounts receivables, and inventory. This will help
isolate the irregularities in the company’s accounting, if indeed the company has
manipulated numbers. The second measure is to look at the expense side of
accounting. These ratios will help to determine if the company has unexplained
variances in their reported expenses. If they do, then that would raise red flags. These
Sealed Air 77
ratios will be used to determine the integrity and accuracy of the numbers in the
company’s financial statements.
Sales Manipulation Diagnostics:
To determine whether any manipulation has occurred in altering the outlook of
Sealed Air’s revenues, we analyzed the balance sheets and income statements of
Sealed Air and their main competitors for the past five years. This is helpful to illustrate
the patterns between Sealed Air and the industry. The similarities and differences can
be quickly spotted by comparing the following ratios. Through ratio analysis we can
examine the impact of current assets and liabilities on net sales and compare this
information to industry norms. Ultimately, this gives the reader a good visual tool to
discover any possible red flags.
Net Sales / Cash from Sales:
The first sales manipulation ratio we calculated is net sales divided by cash from
sales. This ratio allows us to determine the actual amount of cash the company has
received from their sales compared to the amount of revenue recognized from sales
during the period. This ratio, for any company, should always end up around 1,
because when a company sells their goods or services they want to receive
compensation. If this number were to be far from 1 then a ‘red flag’ would be raised,
for either recognizing too much sales or not recognizing enough. Also, if there are large
variances in the company’s number from year to year, a ‘red flag’ would be raised.
Sealed Air 78
As the chart above shows, Sealed Air Corp. and its competitors, net sales to cash
from sales ratios all stay around 1 and do not change drastically from year to year.
Industry (packaging and container) wide, all the companies’ ratios seem to be
coinciding. This cancels out the need for ‘red flags’ to be raised. The quality of
accounting disclosure is acceptable. Overall, Sealed Air Corp. is average among its
competitors.
Net Sales / Net Accounts Receivables:
To measure how much credit sales consist of a company’s total sales, we can
use a Net Sales to Net Accounts Receivables ratio. The method is calculated by taking
the firms total sales for that period and dividing that number by the amount of
receivables the company has on the books. This sales to receivables ratio is
“an accounting measure used to quantify a firm's effectiveness in extending
credit as well as collecting debts. By maintaining accounts receivable, firms are
indirectly extending interest-free loans to their clients. A high ratio implies either
that a company operates on a cash basis or that its extension of credit and
collection of accounts receivable is efficient. A low ratio implies the company
Sealed Air 79
should re-assess its credit policies in order to ensure the timely collection of
imparted credit that is not earning interest for the firm” (investopedia.com).
Since the packaging and container industry do not typically have storefronts to sell their
products, it is generally assumed that all orders are made through credit transactions.
Firms generally will want a high sales to receivables ratio since that is an indicator of
how fast the company is converting its sales into cash. Not only does this figure
determine cash collections, but this ratio is also a good measure of the firm’s liquidity,
which would help potential creditors determine the firm’s credit risk. As the graph below
shows, the industry generally follows the same methodology. However, Sealed Air
seems to be the exception by having substantially lower sales to receivables ratio,
meaning that more and more of the company’s sales are still tied up in the collections
process.
Given the data that was presented through the company’s 10-K, we can see that
Sealed Air has a higher amount of receivables relative to their sales. This indicates that
the firm probably offers more terms for collection than most of its competitors and also
shows us that the firm is not converting transactions into cash as fast as their
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competitors. While these relaxed credit terms might entice prospective customers, this
could potentially cause Sealed Air serious problems when it comes to estimating
allowance for doubtful accounts. By examining the company’s common-sized financial
statements, we can see that the firm has consistently kept nearly 40% of current assets
in accounts receivables; an amount that far exceeds its competitors. Perhaps the only
factor that is preventing this ratio from becoming a potential red flag is the fact the
industry participates in an overwhelmingly credit transaction environment.
Net Sales/Inventory:
The Net Sales/Inventory ratio shows if a firm’s sales are supported by their
inventory levels. Both an increase in net sales and a decrease in inventory would lead to
higher ratios (which firms strive for). Firms with smaller inventory levels are generally
doing a better job at managing their costs and avoiding excess quantities of unsold
product to build up. Firms who are experimenting with new materials and products will
be losing money if they fail to use their large inventory and convert it into revenue for
the company. The packaging industry shows a mixture of results, indicating that firms
are struggling to reduce their inventory levels, or at least prevent their inventory growth
from exceeding their increase in net sales.
Sealed Air 81
The graph indicates that Greif, Packaging Corp. of America, and Pactiv have all
gradually increased during the past five years. These firms have accomplished this by
holding their inventory levels relatively constant while steadily increasing their sales.
Conversely, Sealed Air and Bemis have both gradually decreased over this time period.
It is also interesting to note that Sealed Air’s ratio has steadily decreased over the past
two years. There are a few possible reasons for why this may have occurred. A
decrease in net sales and/or an increase in a firm’s inventory are the two most obvious
explanations. However, in Sealed Air’s case, their ratio dropped because inventory has
risen sharply since 2006 while their net sales has only increased gradually. Due to the
lack of volatility from these ratios, there are no red flags to report. Although Sealed Air’s
ratio has decreased, it has been gradual and has remained relatively close to the
industry norm.
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Conclusion:
Overall, Sealed Air is average when compared to other firms’ sales manipulation
diagnostics. The one exception is their net sales/receivables ratio, which is significantly
lower than their competitors. Sealed Air does not convert their transactions into cash as
quickly as other firms. However, the packaging industry is primarily a credit transaction
environment, thus reducing the possibility for this to become a red flag. After looking at
the firms’ other sales ratios, there are no red flags to report within the industry. In the
net sales/cash from sales ratio, all the firms are hovering around 1, indicating that the
packaging industry is receiving their cash payments fairly quickly after sales.
Additionally, the net sales/inventory ratio measures how each firm’s inventory supports
their net sales. Sealed Air is comparable with other firms and the industry average for
this category. There are no abnormal fluctuations among the firms, and therefore no
cause for red flags.
Expense Manipulation Diagnostics:
Expense diagnostics are another useful way to analyze trends in the packaging
industry. These ratios take a closer look at a firm’s income statement and cash flows
and provide some visual correlations between the two. Some of the criteria used to
evaluate and benchmark competing firms include: firm’s total accruals, operating
income, and cash flows from various activities. By comparing the firms within the
packaging industry, we can quickly spot any irregularities or potential red flags using
expense diagnostics.
Asset Turnover:
Asset turnover is computed by simply dividing a firm’s net sales over total assets.
This ratio is useful to determine the amount of sales that are generated from each
dollar of assets, thus the higher the ratio the better. A growing firm will naturally
expand their activities and acquire more total assets. It is important to compare the
Sealed Air 83
firms within the packaging industry to determine if they are generating enough sales to
compensate for their increasing asset levels. Any major deviations in the ratio
from year-to-year need to be examined carefully to ensure firms are properly writing off
their assets. If there is a failure to impair assets correctly, such as goodwill or PP&E, the
ratio will increase dramatically.
According to the graph, there has been a consistent increasing trend for the
industry. However, Sealed Air has the lowest asset turnover of its competitors. Unlike
Pactiv who has a sharp decline from 2006-2007, Sealed Air shows very a subtle change
on an annual basis. The fact that their ratio is well under 1 indicates a possible lack of
production efficiency within the firm. Sealed Air’s significant amount of goodwill also
leads to much higher total assets than its competitors. Other firms in the industry have
significantly smaller amounts of goodwill, which is reflected in their higher ratios. SEE’s
lower ratio is also supported by our restatement of their financials. When we began to
depreciate goodwill and capitalize the useful value of R&D, the value of total assets
changed relative to sales.
Sealed Air 84
CFFO/OI:
One way to assess the quality of a company’s earnings is by measuring the
difference between the firm’s operating income and cash flows from operations. This
method can help link together the operating cash flows from the statement of cash
flows to the operating profit on the income statement. Generally, firms with a 1 to 1
ratio show that operating cash flows are mainly derived from earnings from operations.
In the chart below, we can see how the industry widely fluctuates from 2003 and 2004,
but generally settles back to nearly 1 during the last few years.
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As the graphs above indicate, Sealed Air has had a more consistent trend than
its competitors have. During the last 2 years we start to see a trend of the industry
reverting back to 1. As for Sealed Air, they have generally been to closest to 1 despite
the fact that they consistently have the lowest ratios in the packaging and container
industry. This reason this is due to cash inflows coming from other activities. However,
it should be noted that there was a drastic -10.54 point decrease that occurred in 2005.
By looking at both the operating profit and operating cash flows of that year, we see
the main component that was responsible for the dramatic dip was largely due to an
18% drop in operating cash flows. By closely examining the statement of cash flows
presented in the company’s 10-K, we see that Sealed Air had greatly reduced their
accounts payable and notes payables during that year. This would explain the sharp
decline in the CFFO/OI Change graph in 2005.
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CFFO/NOA:
The ratio of cash flow from operations to net operating assets shows how well a
company is utilizing their net assets and how much cash is coming from the day to day
operations of the company. Net operating assets include the company’s plant, property,
and equipment. The larger this ratio is, the better the company is making use of their
PP&E. This is an important ratio to analyze because it demonstrates how efficiently a
company uses operating equipment as it feeds back into operating cash flow. In
essence, for every one dollar spent on operating assets, how much flows directly back
into the firm. If a firm was struggling in asset affiance they would most likely either
inflate the cash flow from operations or deflate the net operating assets. A possible way
to create these adjustments is to look for large sell offs of pp&e or inconsistent
variations of cash flow from operations. These would be two key signifiers of skewed
accounting numbers that have been modified in order to create a more presentable
CFFO/NOA ratio.
Sealed Air 87
As the first graph shows, in the raw form, Sealed Air Corp. is making the best
use of their net assets, by a landslide, compared with their competitors. They are
getting the best return from their operating assets, being the closest to 1 out of their
competitors. Although, Sealed Air Corp. does not have a consistent ratio over these 5
years; the drop of from 2006 to 2007 in this ratio can be explained by a loss in net cash
flow from operations. The loss in CFFO is from a loss on a sale of small product line and
an increase in current liabilities on their statement of cash flows.
The second graph, in the change form, shows that Sealed Air Corp. has either
stayed above or with the packaging and container industry average. The drop off from
2003 to 2004 is because from 2002 to 2003 when Sealed Air Corp. had positive
increases in both CFFO and NOA, but from 2003 to 2004, the company had major
decrease in both CFFO and NOA. The reason Sealed Air had an increase from 2002 to
2003 is that their net earning went from a loss to a gain and because accounts payable
dropped largely from 2002 to 2003. On the other side of things, the large drop from
2003 to 2004 can be explained by the huge increase of accounts payable and the net
loss of the company.
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Total Accruals / Sales:
To determine how well a company’s sales are derived from receivables, we used
an accrual to sales ratio. This ratio is calculated by taking the firms cash flows from
operations and subtracting out the net earnings of that period. We then take that
amount and divide it by the company’s total sales for that year. If the ratio is high, we
can conclude that a majority of the firm’s transactions are made on account. On the
other hand, if the ratio is relatively low, then we can assume that sales are made
through other means than credit accounts. Generally, it is preferred that the ratio be as
close to 1 as possible. Below, we can see that the industry fluctuates dramatically, thus
making it extremely difficult to plot any practical trend line; however, we can
reasonably assume that the industry gravitates towards 5%.
As the graph above shows, Sealed Air’s accruals to sales ratio seems to
erratically head downward to a ratio of nearly zero. By looking at the company’s
financials, we can see that the company’s total accruals have been declining at a rapid
rate. By further inspecting Sealed Air’s statement of cash flows, we can observe that
Sealed Air 89
the firm’s net earnings are rising at a faster rate relative to their operating cash flows.
The reason for such a sluggish growth in operating cash flows is explained by the facts
that Sealed Air used much of its cash resources to pay off partial balances on deferred
taxes. This steadily increased their accounts receivables, purchased more current
assets, and paid off a substantial portion of its current liabilities; which would in turn
suggest that less and less sales are supported through accruals.
Expense Diagnostics Conclusion:
As identified earlier as a major key success factor, firms in the packaging and
container industry must follow a strict cost leadership business strategy with a heavy
emphasis on maintaining a tight control on costs and lowering input costs as much as
possible. Given the expense diagnostics presented above, we can see that Sealed Air
has a mixed performance in this regard. In both CFFO/OI and CFFO/NOA, Sealed Air
has consistently outperformed the industry. However, in the asset turnover and accruals
over sales, we can see that the firm has lagged in these categories. Despite the mixed
performance, we cannot see any potential red flags that would cause us to restate any
financials.
Potential Red Flags
While performing the previous steps in the accounting analysis, several red flags
were located within Sealed Air’s accounting. Red flags are indicators that can
potentially point out questionable accounting. These signs help capture the attention of
the analysts so that they know what aspects of a company’s accounting they need to
examine closer. It is important to fully examine past and present financial statements
in order to locate the red flags. Once red flags have been located and examined, the
analyst can make proper adjustments to the financial statements to aid in accurately
valuing the company.
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Sealed Air’s research and development raised a potential red flag because of the
sudden 16% ($12.6 million) increase in R&D expenses between 2006 and 2007. The
reason for this sudden increase in R&D was due to the relocation of certain expenses.
The company decided to include “certain expenses for technical customer support and
facility occupancy costs in research and development expenses.” (Sealed Air 10K) This
expense was previously located in marketing and administrative expenses. This
concludes that the red flag was a false alarm and the cause for the large increase in
R&D was due to the addition of these expenses.
Another red flag that was raised pertained to the impairment of Sealed Air’s
goodwill. Sealed Air has not impaired any goodwill in the last six years. By not
impairing their goodwill, they overstate their assets and understate their expenses.
Understated expenses results in the overstatement of net income and equity.
Companies commonly do not impair their goodwill in order to appear more profitable to
analyst. Sealed Air would have reported negative earnings from 2002-2004 if they
would have properly impaired twenty percent of their goodwill. After 2004 it would
have seriously hindered the amount of earnings shown on the financial statements. In
conclusion, we can see that Sealed Air was attempting to trick analyst into believing
that they had received higher earnings than actually occurred. To accurately account
for Sealed Air’s lack of impairment we must restate the financials to aid in getting a true
value of the company.
Undoing accounting
It is important to take the steps to restating a firms’ financials because it can
help reverse distorted reported financials and create a clearer picture of asset values,
earnings, liabilities, expenses, and revenues. Companies often understate expenses in
order to overstate earnings. In addition to this, companies may choose to overstate
depreciation or impairment in order to over state expenses and understate earnings.
When a firm chooses to understate earnings this is known as taking a ‘big bath’. Taking
a big bath may seem irrational to a novice investor but in the long run it will make the
Sealed Air 91
next periods’ reported earnings often look substantially better than the previous large
loss. Therefore, it is important to undo the distorted accounting numbers of firms and
create more transparent financial records to allow investors to accurately value a firm’s
earning potential.
Goodwill:
In the case of Sealed Air, goodwill assets consisted of upward of 45% of asset
values and therefore needed to be restated. The table below shows the percent of
assets that are composed of goodwill over the past six years.
The process we took to restating goodwill extends back to 2002 when GAAP
changed from the standard amortization of goodwill to the mandated annual
impairment test of goodwill. Although companies are required to check annual for
goodwill there is a lot of flexibility and lack of disclosure in this procedure. The first step
in restating the financials for Sealed Air begins with the correct impairment of goodwill
since Sealed Air stated that over the past six years no impairment was needed. For an
accurate impairment value of goodwill, we chose to impair the asset by 20% over six
years. The following is a table that demonstrates the difference in the values of
goodwill before and after initial impairment.
Sealed Air's Goodwill as a Percent of Total Assets
Year 2002 2003 2004 2005 2006 2007
Percent of Total Assets* 46.31 41.23 39.51 39.23 38.99 36.22*Before Impairment
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When impairing the asset value of goodwill, investors can see that goodwill is
greatly reduced, thus lowering the total amount of assets. The following table will show
the difference in total asset amounts before goodwill was impaired and the total value
of assets after goodwill was impaired.
Total Asset Value
2002 2003 2004 2005 2006 2007
Total Asset Value Before Impairment 4,960 4,704 4,885 4,864 5,021 5,438
Total Asset Value After Impairment 4,575 4,393 4,641 4,670 4,856 5,304
(In millions)
Total asset value after impairment was derived by taking the total assets of each
year (stated on Sealed Air’s balance sheets on 2002-2007 10-Ks) and subtracting the
impairment value of goodwill. Although it may not initially seem substantial in
comparison to total asset values, the consequences of not expensing impairment values
will make up for this lack in magnitude.
The first step in impairing goodwill was to decrease the asset value on the
balance sheet. The next step in restating the financials of Sealed Air was to include the
expense of impairment to the income statement. The expenses of each year increased
Sealed Air's Impairment of Goodwill
2002 2003 2004 2005 2006 2007 Goodwill Before Impairment 1926.2 1939.5 1918.1 1908.8 1957 1969.7Goodwill After Impairment 1540.9 1243.4 977.5 774.6 658.3 536.8(In millions)
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on the income statement at the same rate of goodwill’s decline from impairment. The
numeric value of these impairment expenses can be seen in the following table relating
to the expense per year that should have been included on the income statement.
When evaluating impairment expense that was nonexistent before, it is key to
realize that expenses were severally understated prior to goodwill write offs.
Consequentially to increasing expenses, net income will decrease.
Theoretically net income should be a simple computation. However, when
thoroughly evaluating the technicalities of net income a key factor is corporate tax.
After extensive review of Sealed Air’s financials there was no disclosure of the tax rate
used year by year. Taxable income varies year by year based on increases and
decreases of sales and expenses. The following table demonstrates the differences in
each year’s pre-tax income, actual tax expensed, and the tax rate used to compute
taxes.
Tax Table
Year 2002 2003 2004 2005 2006 2007
Taxable Income* -392 377 323 377 400.1 456
Taxes* -82.8 137 107 121 126 103
Corporate Tax Rate Estimate** 21.1 36.2 33.2 32.1 31.5 22.6
*In millions, **In percentages
Sealed Air's Impairment Expense Year 2002 2003 2004 2005 2006 2007
Dollar Amount* 385.2 310.8 224.3 193.6 164.5 134.2*In Millions
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In restating Sealed Air’s financials we found it difficult to place exact tax expense
on income due to the fact that we were altering the expenses and thus changing the
taxable income. Therefore we found it suitable to estimate taxes based on an average
of the previous six years corporate tax rate. The estimated tax expense that we
calculated was 29.46%. Restated net income was calculated by taking previously stated
income before tax and expensing impairment values and multiplying this value by our
estimated tax rate. The following table shows the difference in not including the
impairment expense in the income statement and including it.
By including the impairment expense in the income statement, there is a large
difference in net earnings. There could be several factors that influence this difference
in income such as human error, over estimation of impairment expense, or true
overstatement of earnings when impairment expenses are not taken. It is important for
each investor to evaluate each of these reasons on an individual basis. Large
differences such as the ones stated in the above table could sway investment decisions.
That is why it is key to take the steps to undo the accounting of most firms.
Furthermore, net income values feed directly into retained earnings on the
balance sheet. This is how the altered goodwill asset values on the left hand of the
balance sheet will equal the right hand side of liabilities and owners equity. The same
problem of an inaccurate tax rate made it difficult to accurately portray the changed
Net Income
Year 2002 2003 2004 2005 2006 2007
Before Impairment Expense* -309.1 240.4 215.6 225.8 274.1 353
After Impairment Expense* -694.3 -70.8 -28.78 80.44 109.53 219
*In millions
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values in equity due to the fact that changes in equity stem from changes in net income
(a product of tax computations). The table below best describes our estimates in the
values of retained earnings that the impairing goodwill would have altered.
Retained Earnings
Year 2002 2003 2004 2005 2006 2007
Before Impairment* -309.1 240.4 215.6 255.8 274 353
After Impairment* -694.3 -70.75 -28.8 80.4 109.5 219
*In millions
After reviewing all of the restated financials of the past six years, the values
found would indicate that expenses were greatly understated leading to a large
misinterpretation of net earnings. However, due to taxes and human error these
numbers could be misleading. Impairing goodwill is a difficult procedure to undertake
due to the low disclosure and lack of industry standards. Despite the differences in
values of impairment, it is important to understand that goodwill is truly a way to over
inflate asset amounts to offset liabilities and equity and vice versa.
It is our conclusion that Sealed Air’s asset values are truly overstated and
impairment expenses need to be shown on the income statement. The effect of
restating financials greatly lowered the value of net income and hinders possible
profitable earnings in the future, enough to raise several red flags and show an
inaccurate financial description.
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Financial Analysis, Forecast Financials, and Cost of Capital Estimation
In order to effectively analyze a company, investors and analysts must look at
the financial information of the company and their industry competitors. This is a three
step process, including ratio analysis, financials forecasting, and finding the cost of
capital of the company. The first step is calculating a variety of ratios that deal with
liquidity, profitability, and the capital structure. With these ratios, one would be able to
see trends in the company and in their competitors. These ratios will also help with
forecasting the company’s financials, which is step two. We will be forecasting Sealed
Air’s financials, income statement, balance sheet, and statement of cash flows, out ten
years to see where they might be and to get a better picture of the company. Finally we
will compute the cost of capital for the firm in order to study the value of the company.
Financial Analysis
Analysts, over time, have developed a series of ratios to breakdown a company’s
financial statements into numbers that can be easily compared to those of their
competitors, the industry average, and the acceptable ratios determined through time.
These ratios help to accurately evaluate a company’s overall financial profitability and
health. There are 16 ratios broken down into 3 categories: liquidity, profitability, and
capital structure. Analysts can use these ratios to see trends in a company and an
industry. With financial analysis, we will be able to see how Sealed Air stacks up against
their competitors. These ratios will also be used later on to help forecast the company’s
financials.
Liquidity Ratio Analysis:
Liquidity ratios measure a company’s ability to meet short-term financial
obligations. These ratios include current ratio, quick asset ratio, accounts receivable
turnover, days sales outstanding, inventory turnover, days supply inventory, and
working capital turnover. These ratios are commonly used by lenders because they
show a company’s, potential borrower’s, credit risk. The higher the liquidity ratio the
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better, because it demonstrates that the company has the resources to pay off their
short-term financial obligations, should they have to. (Managers might feel pressured to
keep these ratios at the right level in order to adhere to debt contract.)
Current Ratio:
The current ratio is found by dividing the current assets by the current liabilities.
This ratio shows how much money the company has for every $1 incurred in short-term
liabilities. It shows the company’s ability to pay off their short-term obligations with
cash or assets that can be converted quickly into cash, without losing value. The higher
this ratio is the more able a company will be in paying off their short-term obligations.
Even though Sealed Air’s ratio is the lowest out of their competitors, their ratio is still
above one. Also, Sealed Air’s ratio has maintained a consent rate, with no abnormal
changes over the past five years. This cannot be said about their competitors, how
ratios seem to fluctuate. Sealed Air would be able to pay off their short-term obligations
without problems should the need arise.
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Quick Asset Ratio:
The quick asset ratio, otherwise known as the acid test ratio, is the relationship
between a company’s current assets, minus inventory (cash, cash equivalents, short-
term investments, and receivables), and its current liabilities. This ratio shows the
company’s ability to cover their current obligations. Inventory has been removed for
this ratio so the measure of liquidity can be portrayed more accurately. Inventories may
or may not be able to be converted into cash as quickly as necessary without losing
value due to obsolesce or newer technology. The ideal ratio for a company would be 1
or above. This would indicate that the company has more assets that can be converted
to cash (excluding inventory), than liabilities. Sealed Air, has not only stayed over the
industry average all five years, but also is one of the few firms that have stayed above
1.0 as well. All the other competitors, not including Bemis, have all dropped below 1.0
at some point in the last five years. The significance of this is that it shows that Sealed
Air would be able to cover their debt without the need of their inventory.
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Working Capital Turnover:
The working capital turnover ratio compares the depletion of working capital to
the generation of sales. It is formulated by taking sales over the working capital
(current assets minus current liabilities). This ratio is used to analyze the relationship
between the money used to fund operations and the sales produced from it. These
operations and inventory are then converted into sales revenue for the company. A high
ratio implies that a firm generated a large amount of sales compared to the money
required to fund the sales.
According to the past five years, Sealed Air has done a significantly better job in
this regard than its competitors. Sealed Air’s working capital is much lower than the
industry average which drives their ratios well above the norm. The impact of their
sales is maximized because of their relatively low amount of funding. In 2006, Sealed
Air’s working capital was nearly double the amount in 2005, causing the dramatic drop
to just over 12 turns. However, this was still the highest ratio among its competitors for
2006.
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A/R Turnover:
The accounts receivable turnover ratio measures how efficiently a firm uses its
assets, and how quickly they collect their accounts receivables. More specifically, it
measures firms’ effectiveness in extending credit as well as collecting debts. The
quicker a company collects its receivables, the higher their ratio will be. A lower ratio
indicates that more cash is due to a firm floating for longer periods of time.
This graph shows a wide disparity between Sealed Air and its competitors.
Sealed Air’s ratio has remained constant over the past five years and is significantly
lower than the other firms. Their amounts of sales and receivables have both increased
at virtually the same rate over this time period. Bemis also has a remarkably constant
ratio over the past five years, which is also very consistent with the industry average.
However, the other firms have a moderate amount of volatility from year-to-year. For
example, Pactiv has a very large increase from 2006-2007. This is due to their steady
increase in sales while keeping their receivables level 50 million less than 2006. Sealed
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Air’s low ratio indicates that they collect receivables less often than the other firms,
leading to a level of inefficiency.
Days Sales Outstanding:
This ratio measures the number of days that a company takes to collect revenue
after a sale has been made. Due to the high importance of cash in running a business,
it is in a company's best interest to collect receivables as quickly as possible. By quickly
turning sales into cash, a company has the chance to put the cash to use again, which
is later illustrated in the cash to cash cycle. Analysts use the DSO to determine whether
a company is trying to disguise weak sales, or is generally being ineffective at bringing
money in, thus leading to a high DSO ratio.
This graph is directly related to the A/R turnover ratio. The dramatic spike in
Pactiv’s A/R turnover in 2007 is mirrored by the sharp decline in its DSO ratio in the
same year. Similarly, Sealed Air’s low A/R turnover ratio is indicated by its extremely
high DSO ratio, which has fluctuated slightly between 60-65 days over the past five
years. By examining the graph, Sealed Air has taken roughly 15 more days to collect its
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receivables over this time period than the industry average. They are at a severe
disadvantage to its competitors because it takes so much longer to put its cash to use
again. It is also important to note that the industry as a whole is experiencing a
downward trend. This could make it even more difficult for Sealed Air to “catch up” to
the industry, as most firms seem to be making strides in reducing their DSO.
Inventory Turnover:
The inventory turnover ratio shows how many times a company's inventory is
sold and replaced in a given year. It is computed by dividing your COGS over the
inventory (sometimes average inventory is used to minimize seasonal factors). A low
turnover ratio implies poor sales and, therefore, excess inventory. High inventory levels
are undesirable because they represent an investment with a rate of return of zero.
Conversely, a high ratio indicates either strong sales or ineffective buying.
Sealed Air is slightly below the industry average; however the annual fluctuations
are nearly identical to the industry average line on the graph. From 2003-2005, Sealed
Air’s COGS rose at a faster rate than its inventory levels, causing a gradual rise in their
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ratio. However, over the last couple of years their inventory level has increased sharply
enough to cause their ratio to come down slightly. In fact Sealed Air’s turnover ratio
was the lowest among its competitors in 2007, at just under 6 turns. This could be a
cause for concern because too much excess inventory is being held compared to other
firms within the industry. Sealed Air’s sales have steadily rose over the past five years,
indicating that this is not the culprit for their relatively low ratio.
Days’ Supply in Inventory:
The DSI is simply the number of days it takes for a firm to turnover its total
inventory. The amount of days has a direct correlation with inventory ratio, because we
know intuitively that the quicker your inventory gets turned over, the fewer amount of
days it spends in inventory.
This relationship between the DSI and the inventory turnover ratio is illustrated
in this graph. Greif and Packaging Co. of America had the highest inventory turnover,
and thus the lowest DSI. Sealed Air is somewhat consistent with the industry average,
however the gap has widened over the past few years. In 2003, Sealed Air was
identical to the industry average, but in 2007 their DSI was over 10 days more than the
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average, and became the highest among its competition. Once again, this is troubling
for Sealed Air because there is clearly a growing trend in the inefficiency of its inventory
management.
Cash To Cash Cycle:
In order to fully comprehend how long it takes for a firm to realize the profits
from their inventory, we use the cash to cash cycle to determine the amount of time
that is needed to turn assets into cash flows. This cash conversion cycle is calculated by
taking the Days Supply Inventory (time for inventory to turn over) and adding that
amount to the Days Sales Outstanding (time it takes to collect on sold inventory). Firms
that have a relatively lower number when compared with competitors are generally
more efficient in their overall liquidity and therefore are deemed more credit worthy.
As the figure above shows, Sealed Air has a very serious problem with their cash
conversion cycle. For the past 4 years, Sealed Air has consistently far exceeded the
industry average by at least 20 days. It would appear that Sealed Air offers more
flexible credit terms to its customers. While this practice might attract potential clients,
this is considered somewhat risky due to certain factors such as currency risk and the
Sealed Air 105
lower probability of estimating allowance for doubtful accounts. These risks would
therefore translate into an unfavorable liquidity concern.
Conclusion
By examining the various liquidity ratios, we can compare the efficiency of
Sealed Air to other firms within the industry. The liquidity ratio analysis shows that
Sealed Air’s current ratio is significantly lower than the industry average at just over 1.
However, their quick asset ratio of approximately 1.1-1.2 slightly over-performs the
industry average. Sealed Air’s operating efficiency is measured by its inventory turnover
and receivables turnover. Their low receivables turnover indicates a level of inefficiency
when compared to its competitors. On the other hand, Sealed Air’s cash-to-cash cycle is
strong which allows them to convert their products into cash more quickly than other
firms. Despite some variations, Sealed Air maintains a similar level of liquidity to its
competitors. Their trends are also fairly stable with the exception of working capital
turnover.
Ratio Performance Trend
Current Ratio Under‐performed Stable
Quick Asset Ratio Over‐performed Stable
Working Capital T/O Over‐performed Increasing trend
Accounts Receivables T/O Under‐performed Stable
Inventory T/O Under‐performed Decreasing trend
Cash‐to‐Cash Cycle Over‐performed Increasing trend
Overall Average Stable
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Profitability Ratio Analysis:
The profitability ratio analysis shows how well a firm’s revenue covers their
expenses. In essence, how effective a company is at generating profit. Each of the
following ratios is shown as a percentage of sales, where sales equal 100% with the
‘common size income statement’. The higher the percentage is, the more efficient a
company is at generating profit. There are nine profitability ratios: gross profit margin,
operating profit margin, net profit margin, asset turnover, return on assets, return on
equity, Z-Scores, sustainable growth rates, and internal growth rates.
Gross Profit Margin:
Gross profit margin ratio is gross profit, sales minus cost of goods sold, divided
by sales. This ratio provides information to see how profitable a company is after they
have deducted their fixed and overhead costs, which are involved in managing
inventory. This is the first of four that show the operating efficiency of the company.
The higher this ratio is the better and more efficient a company is at covering their
expenses, which could lead to greater profitability. Although the following graph will
show a wide spread in the packaging industry, Sealed Air and Pactiv are more proficient
in maintaining a lower cost of goods sold. Sealed Air has kept an above industry
average, 5% and more, for all five years.
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Operating Expense Ratio:
The operating expense ratio is computed by taking selling and administration
expenses divided by sales. This ratio shows that for every dollar of SG&A expenses
there are X amount of dollars from sales that will cover these expenses. Sealed Air is a
leader in maintaining operating expense efficiency above the rest of the packaging
industry. SEE also has had a steady operating expense ratio over the past five years as
showed on the graph below.
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Operating Profit Margin:
Operating profit margin is found by dividing a company’s operating income
(gross profit minus selling and administrative expenses) by total sales. The higher a
company’s percentage of sales that operating income is, the more profitable the
company becomes after accounting for their operating expenses. As the graph shows,
Sealed Air has one of the top percentages in the packaging industry. Again, Sealed Air
beats the industry average all five years.
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Net Profit Margin:
A firm’s net profit margin is calculated as net income divided by sales.
Essentially, it measures how much out of every dollar of sales a company actually keeps
in earnings. Firms strive for a high profit margin because this indicates that they have
superior control over their costs compared to competitors. Increased earnings are
obviously desirable, but an increase does not automatically translate into an increasing
profit margin. For example, if a company has costs that have increased at a greater rate
than sales, it leads to a lower profit margin. This suggests that a firm does not have
costs under control.
The packaging and containers industry has seen a steady rise in profit margins
over the past five years. During this time period, Sealed Air has remained near the top
of the chart in relation to its competitors. Not only have they stayed at or above the
industry average, but SEE’s margin has increased steadily with no drastic fluctuations.
This indicates that Sealed Air has consistently managed their costs at a more efficient
rate than most firms in the industry. On the other hand, Pactiv has experienced a
tremendous amount of volatility in their net profit margin. In 2005 they bottomed out
near 2%, only to rebound to over 9% the following year, which proved to be the
highest margin within the packaging industry in 2006.
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Asset Turnover:
Asset turnover is a useful means of measuring the productivity of asset use, and
is computed by dividing sales over total assets from the previous year. The ratio shows
the amount of dollars of sales generated for every $1 invested in assets. The higher the
ratio, the more profitable a firm’s assets will be. For manufacturing companies such as
Sealed Air, asset turnover ratios are very important in evaluating the profitability of a
company. Firms within the industry tend to use expensive machinery to manufacture
their products, so it is important to compare how much revenue they are able to
produce from expensive assets.
As an industry, the average asset turnover increased to 1.2 in 2007. This
indicates that firms within the industry are relatively successful in generating more sales
than they are investing in assets. However, Sealed Air has consistently under-performed
in this area over the past five years. It has slowly increased over this time period, but
was still the only firm in the industry with a ratio under one in 2007. For every dollar of
assets they generated only $.93 of sales. Conversely, Greif generated over $1.50 of
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sales per dollar invested in assets. Sealed Air’s low ratio could possibly be explained by
their high R&D costs.
Return on Assets:
Perhaps the greatest indicator of profitability potential is the return on assets,
which is determined by the firm’s net income of that period divided by the company’s
total assets of the year before. The reason that we use the previous year’s total assets
instead of the current one is that it is last year’s assets that are being implemented in
producing the current year’s income.
By looking at graph presented above, we can see that the packaging and
container industry has been steadily increasing their overall productivity and growing
their return on assets by an average of 5.4% over the last 5 years. While Sealed Air
has consistently had positive growth on their return on assets we can see that the
company is starting to lag behind its competitors in this regard, especially over the past
2 years. This could potentially be attributed to a lost in asset utilization or perhaps a
Sealed Air 112
lack in investments of new assets. This below par level of productivity could potentially
hurt Sealed Air’s bottom line in the long run unless immediate action is taken.
Return on Equity:
Return on equity is crucial ratio for firm systematic analysis. ROE measures how
well a company can turn capital from shareholders into returns for the firm. ROE is
measures by taking net income and dividing it by total shareholder’s equity. In essence
return on equity is the key measure of overall profitability for a firm. “ROE is affected
by two factors: how profitably it employs its assets and how big the firm’s asset base is
relative to shareholders’ investments” (Palepu and Healy). This statement indicates that
ROE can be further broken down to demonstrate its relationship between return on
assets and financial leverage. Leverage is the amount of debt a firm has in relation to
its equity. ROE is often compared to the cost of equity capital. Analysis compares these
two values because it helps determine that ROEs in the long run create an equilibrium
with the cost of equity capital.
In our analysis of Sealed Air’s and competitors return on equities, SEE showed up
to three times higher than the industry average in some years. Overall, SEE was above
industry average each year from 2003-2007. However, once return on equity was
calculated using revised financial statement values there was a large decrease and the
firm’s ROE dropped to extreme industry lows for the same time period. We believe that
SEE should not be at either extreme but due to accounting flexibility the values are not
valid. The restated financials took created extreme detriment to net income because
such large portions of goodwill were expensed. When the impaired goodwill was
expensed it caused net income to decrease significantly thus leading to the lower net
income values in turn lowering ROE. If a more conservative approach to the impairment
of goodwill was taken the values of ROE from 2003-2007 would be on par with industry
average. When comparing the slope of SEE’s return on equity in both the stated and
revised format, investors can see that although the values differ significantly the
upward trend is constant. It is important to note the upward slope of this line because
Sealed Air 113
of its correlation to an upward slope of profitability. The following is a graph presenting
SEE and competitors return on equity computations.
Firm Growth Rate Ratios:
In order to evaluate the sustainability for future profits of a firm, we must
calculate the potential growth rates for both the company and its competitors. By
analyzing prospective growth rates, we can estimate the future economic condition of
the firm relative to its industry. The two growth rates that we will be using are the
Internal Growth Rate (IGR) and the Sustainable Growth Rate (SGR).
Internal Growth Rate:
When attempting to measure potential growth within a firm, many use the
Internal Growth Rate to get a general idea of what to expect for company growth. This
method hypothetically presumes what the potential growth could be assuming no
outside financing is used, meaning that nearly all new capital is taken directly from the
firms cash flows. This figure is calculated by taking the firms Return on Assets (income
Sealed Air 114
divided by the previous year’s total assets) and multiplying it by the company’s
plowback ratio (1-dividend payout ratio). However, there is a slight drawback to this
figure. If the company has no dividend policy, then that company’s IGR would simply be
their Return on Assets rate. For many companies like Pactiv, their IGR is their ROA.
As the graph above shows, much of the industry stays in between 3% and 5%. With
Sealed Air, we can see that this firm gravitates more towards the industry average and
also consistently stays slightly above that rate. By having an internal growth rate that
consistently outperforms the industry average, one can conclude that Sealed Air
exhibits a positive operating efficiency.
Sustainable Growth Rate:
Another measure of estimating a firm’s potential growth is by finding the
company’s sustainable growth rate which is calculated by taking the firms’ return on
equity and multiplying it by the company’s plowback ratio. This calculation is a growth
rate that assumes the firm does not alter their current capital structure of debt and
equity. Much like the internal growth rate, if the firm does not have a dividend payment
policy, then their SGR would simply be their ROE.
Sealed Air 115
As the diagram illustrates, we can see that Sealed Air’s performance of their SGR
matches their IGR. With the exception of 2006-07, Sealed Air has held the highest rates
for sustainable growth over all their competitors and industry average. With such a high
SGR, we can estimate that the firm has much potential for future growth within this
industry.
Overall, we can estimate that the potential growth for the packaging and
container industry is exhibiting positive growth rates over the past 5 years which shows
great future potential for this industry. By comparing Sealed Air’s growth rates to their
competitors, we see that the company is definitely one of the top performers in this
business.
Sealed Air 116
Conclusion
After comparing the profitability ratios for the different firms, we are able to
determine Sealed Air’s effectiveness compared to industry levels. Sealed Air’s gross
profit margin, operating expense ratio, operating profit margin, net profit margin, and
return on equity were all higher than the industry average. This is a strong indication
that Sealed Air has been able to maximize profits and control their operating expenses
more effectively than most firms within the industry. Asset turnover was the only ratio
that was below the industry average, which is largely due to their high amount of total
assets. Overall, Sealed Air’s performance is above average compared to other firms,
and still indicates a slightly increasing trend for future years.
Ratio Performance Trend
Gross Profit Margin Over‐performed Decreasing trend
Operating Expense Ratio Over‐performed Stable
Operating Profit Margin Over‐performed Decreasing trend
Net Profit Margin Over‐performed Increasing trend
Asset Turnover Under‐performed Increasing trend
Return on Assets Average Increasing trend
Return on Equity Over‐performed Stable
Overall Over‐performed
Slightly increasing
trend
Sealed Air 117
Capital Structure Ratios:
Capital structure ratios are used to show how a company finances their assets,
shown by the liabilities and owner’s equity section of the balance sheet. There are two
ways a company can finance their assets, either through borrowing money from a
lender (debt) or selling shares of their company as stock (equity). These ratios measure
whether a company is financed through debt or equity. These ratios can be used to
measure the credit worthiness of a company, financial leverage, ability to cover interest
charges, and the ability to pay off liabilities. The three ratios that we will be calculating
are the debt to equity ratio, times interest earned, and the debt service margin.
Debt to Equity:
Capital structure of a company is the framework of how a company finances its
activities. A firm may have some debt and some equity financing. The debt to equity
ratio measures this form of capital structure analysis. It is important to understand the
differences between debt financing and equity financing, because it determines the
amount of default risk there is associated with a firm. The more debt a company has in
their capital structure the higher the chances of default. Furthermore, financial lending
institutions will most likely give firms with very low debt-to-equity structure lower
Sealed Air 118
interest rates on future borrowing. A firm acquires debt financing through long-term
notes payable or by issuing bonds of some type. Equity financing is created through
stock issuance. Debt financing does have both positive and negative aspects, such as
having debt in capital structure gives tax shield benefits. Disadvantages of having debt
is that it may become a struggle to be constantly paying off debtors.
In the case of the packaging industry, according to the graph above, Sealed Air
had the highest rate of debt to equity in its financial structure. However, between 2004
and 2005 there seems to be a shift in the industry to lower the amount of debt used to
finance activities. This shift can be seen in the industry average curve decline. Bemis,
one of Sealed Air’s main competitors, continues to take a very conservative stance on
its debt to equity capital structure. We believe that Sealed Air will continue to down
size their debt to equity financing in future years. The following information is the
numerical data presented from the chart above in table format.
Debt to equity
2003 2004 2005 2006 2007SEE 3.1 2.6 2.4 2 1.6PTV 2.5 2.5 2.4 2.2 2.1PKG 1.5 1.5 1.9 1.9 1.7GEF 2.1 1.8 1.6 1.6 1.2
BMS 1 0.8 1.2 1 1
Sealed Air 119
Times Interest Earned:
As liabilities accrue interest, it is important for a company to have enough capital
to pay these expenses. Times interest earned measures how much coverage is provided
by income from operations to pay interest expenses. Times interest earned is computed
by dividing income from operations by interest expenses. A well functioning firm would
like this ratio to be between 4-7. For example, if the ratio was 4.06, this would be
interpreted as for every one dollar incurred in interest expense then a firm would have
$4.06 to cover the payment of interest expense. It is important to have enough money
to cover these expenses, because if not, it could push a firm into bankruptcy. The
following is a graph of computed time interest earned values over five years of Sealed
Air and its main competitors.
Sealed Air 120
According to the graph, Sealed Air is just below industry average in their times
interest earned values. Although SEE is below average, they have been extremely
constant staying between 4-3.2. Industry average could be skewed because of Bemis’
huge decrease between the years of 2004 and 2005. Overall, investors viewing Sealed
Air’s time interest earned ratio should not be concerned that SEE would be failing to
cover their interest expense payments. The following table displays the numerical data
presented from the graph.
Times Interest Earned
2003 2004 2005 2006 2007
SEE 4 3.2 3.4 3.5 3.9
PTV 5.6 4.1 3.7 5.8 4.9
PKG 4.5 4.7 3.6 7.2 11.5
GEF 1.23 2.4 4.9 6.8 6.3
BMS 19.1 18.9 8.2 6.8 6.1
Sealed Air 121
Debt Service Margin:
The debt service margin coverage ratio measures the “adequacy of cash
provided by operations to cover required annual installment payments on the principal
amount of long term liabilities” (Financial Statement Analysis Notes- Mark Moore’s FIN
3321). Debt service margin ratio is calculated by dividing cash flow from operations by
the previous year’s installments due on long term debt. The numeric value of the ratio
states that for every one dollar in long term debt due currently, the expense will be
covered by the value of the ratio. The graph above could indicate two different
assumptions, one being that different firms have extremely different takes on this
computation, or alternative firms have a large range in the amount of long term debt
currently due. These differences cause the graph to have such a large range on the
horizontal axis. For example, in 2007 Sealed Air had over 300 million dollars come due
on long term installments but in 2006 SEE had a mere 5.5 million come due in long
term debt (SEE 2008 10-k). Overall, we feel that SEE will continue to see a rise in the
debt service margin ratio. The following is the numerical value from the graph
presented in a table format.
Sealed Air 122
Debt Service
Margin
2003 2004 2005 2006 2007
SEE 234.8 181.7 94.2 1.7 68
PTV 25.8 73.4 5.65 124 2.8
PKG 2.1 1.9 2.22 208 2.5
GEF N/A N/A N/A N/A N/A
BMS 88.8 246.8 331.5 89.4 24.9
Z-Score:
Altman’s Z-score weights five different variables to compute a score for a firm
that indicates the possibility bankruptcy through default risk and credit risk for a
company. This helps asses the company’s credit risk. A company is considered to be
bankrupt when their Z-score is below 1.81. A company with a score between, or equal
to, 1.81-2.67 are labeled in the gray area. A company with a Z-score higher than 2.67 is
considered to have low credit and bankruptcy risks. As the graph below shows, the
packaging and container industry have not only a high Z-score average but also a high
range of Z-scores. After adjustments, Sealed Air’s score decreases only slightly due to a
decline in retained earnings. Sealed Air, though not a leader in the industry as far as Z-
score goes, maintains a score that shows low credit and bankruptcy risks.
Sealed Air 123
The Altman’s Z-Score:
Z-Score= 1.2(Working Capital/Total Assets) + 1.4(Retained Earnings/Total Assets) + 3.3(Earnings Before Interest and Taxes/Total Assets) + .6(Market Value of Equity/Book Value of Liabilities) +
1.0(Sales/Total Assets)
Conclusion
Analyzing the capital structure ratios can help evaluate the industry by
measuring how a firm is financed (either through debt or equity). There are large
disparities between these ratios in the packaging and containers industry, particularly in
each firms’ debt service margin. Sealed Air’s debt to equity ratio is sub-par compared to
other firms; however over the past five years it has decreased rapidly and is
approaching 1. This indicates that Sealed Air is moving closer to a more balanced
capital structure. Their TIE is also under-performing their competition, mainly because
of their relatively large interest expense. Overall, Sealed Air is slightly under-performing
compared to the industry average.
Sealed Air 124
Ratio Performance Trend
Debt to Equity Under‐performed Decreasing trend
Times Interest Earned Under‐performed Stable
Debt Service Margin Over‐performed Decreasing trend
Overall Slightly under‐performed Decreasing trend
Estimating Cost of Capital
Cost of Equity:
The cost of equity is the rate at which an investor demands compensation for
bearing the risk of holding equity based assets. Cost of equity is higher in comparison
to the cost of debt since the risk of default on equity is substantially greater. For
example, in forced liquidation of a firm’s debt holders, bond holders, would receive
partial or whole payment before equity holders. Cost of equity can be derived several
ways, for our valuation we chose to use the Capital Asset Pricing Model approach. The
following is the CAPM model.
Cost of Equity = Risk Free Rate + Beta of the Firm (Risk of the Market – Risk
Free Rate)
Regression analysis was used to calculate the most accurate beta of Sealed Air.
It is important to find a steady beta because it measures how a firm will react in
correlation to the market as a whole. Beta in essence measures the systematic risk that
can be explained by the volatility of the market. A beta of less than one would be less
volatile than the market, and a beta of greater than one should show that the firm’s
security would be more volatile than the market. Another variable in the CAPM formula
is the market risk premium, which is the return of the market minus the risk free rate.
Return of the market was estimated from the S&P 500, and the risk free rate was
calculated using the St. Louis Federal Reserve. The yield curve presents a snap shot of
Sealed Air 125
risk free rates, which can be thought of as annualized rent on money. As the X-axis on
the yield curve increases so does the curve its self. Thus the yield of maturity is higher
creating a higher risk free rate. The reason for the increase on the yield curve is due to
price risk and inflation. Sealed Air investors are long term security holders, not
speculative in theory, this lead us to a larger 10 year risk free rate on the yield curve.
To perform the regression analysis, monthly stock prices over the past 7 years
for Sealed Air, 3 month, 6 month, 2 year, 5 year, and 10 year risk free rates from the
treasury yield curve, and seven year’s of monthly returns from the S&P were gathered.
Regression analysis was then computed over 24, 36, 48, 60, and 72 month investment
periods to estimate beta. Regression analysis creates an output of several variables
including an Adjusted R^2. The numerical percent of Adjusted R^2 explains strength in
the relationship between the market and systematic risk of a security. It is key to
observe the adjusted R^2 in order to estimate the beta because the higher the R^2,
the higher the explanatory power behind the estimated beta. After running all
regression models, the highest value of Adjusted R^2 was presented as the 10 year risk
free rate and the 60 month holding period. The beta from this regression was .87.
After all variables of the capital asset pricing model were estimated, we derived
the cost of equity to be 11.07%. This cost of equity tells us that for each dollar of
equity investment the return required on it would be $0.11. We believe that the
estimated cost of equity is correct because it has high explanatory power in conjunction
to the regression analysis performed. It also complies with the theory that cost of
equity must be higher than the cost of debt. Cost of equity will be used in further
calculations in the weight average cost of capital.
Sealed Air 126
Alternative Cost of Equity:
After running regressions we have established that Sealed Air’s beta is .87. From
this beta we calculated the cost of equity using the CAPM to be 11.07%. We feel that
this measurement may not be accurate, so we use the backdoor cost of equity to get an
alternative measure for Sealed Air’s cost of equity. The cost of equity according to this
alternative method was 16.21%. After these computations of alternative estimates to
cost of equity, we have decided to use the CAPM model because we feel it more
accurately depicts the risk of investing in the company.
Back Door Cost of Equity
ROE P/B-1 Growth Rate P/B Cost of Equity
Sealed Air 21.79%
0.68 8% 1.68 16.31%
Cost of Debt:
Cost of debt for a company is the total weighted average of long term and short
term interest rates on a firm’s liabilities. A firm value is composed of both equity and
debt; therefore it is important to assess the cost of both equity and liabilities to find the
total cost of capital. Debt holders bare less risk compared to equity holders because in
the case of liquidation debt holders are paid first. Cost of debt is lower than the cost of
equity because of its lower default risk rate.
Cost of debt of debt is calculated by taking the weighted rate of current and long
term liabilities from total liabilities. Once the appropriate weights have been assigned to
each liability, the weight is multiplied by the interest rate most relevant to the debt.
Sealed Air’s total current liability weight was 50.9% of total liabilities. In terms of
current liabilities, Sealed Air listed many of their interest rates in their 2008 10-k.
Interest rates for current accounts payable were estimated from the 3 month non-
financial rate AA grade commercial paper acquired from the St. Louis Federal Reserve.
Sealed Air 127
Other current liabilities were stated in the 10-k such as the asbestos settlement liability,
which was carrying a 6% interest rate. Current interest rates were then multiplied by
individual current weights to a sum of 2.08%.
Sealed Air only lists three items in the long term portion of liabilities. Sealed Air’s
long term portion of liabilities has a total weight of 49.1% of their total liabilities. Of
these three listed, long term debt (current portion excluded) was stated to have a
5.47% rate. Defered tax liabilities were given the rate of 3.88% from the seven year
treasury yield for risk free rates. Other long term liabilities were assigned the rate of
5.47% as they were estimated to have the same amount of risk as long term portions
of debt. Long term liabilities total weight rate was calculated as 2.67%. The total
weighted rate for current liabilities was added to the long term total weighted rate to
equal the weighted average cost of debt to be 4.76%. Weighted average cost of debt
will now be used to help calculate the weighted average cost of capital.
Weighted Average Cost of Capital (WACC):
The weighted average cost of capital is the normal rate at which a firm will pay
to finance assets. The WACC is computed by adding together the weighted sum of the
cost of equity and the weighted sum of the cost of debt. This will create the WACC
before tax. WACC before tax is what we will use in our free cash flow intrinsic valuation
model. We found the before tax WACC to be 7.10% based upon the 11.07% cost of
equity and the 4.76% cost of debt. Due to our decrease in equity our restated WACC
was 5.68%. The after tax was calculated to be 6.21% using a 30% tax rate. The after
tax WACC for our restated financials gives us a number lower than our cost of debt
therefore it is not applicable (Restated WACC (AT) 4.47 %< 4.76% cost of debt). The
difference between the after tax WACC and the before tax WACC is that in the WACC
(AT) we multiply our weighted average cost of debt times one minus the tax rate.
Overall, we feel that our computations for the weighted average cost of capital were
fairly accurate, and would provide accurate information for our valuation models.
Sealed Air 128
Weighted Average Cost of Capital
MVE/MVA Cost of Equity
MVD/MVA Cost of Debt
Tax Rate WACC
WACC (BT) 37.14% 11.07% 62.86% 4.76% 0 7.10%
WACC (BT) Revised
14.65% 11.07% 85.35%
4.76% 0 5.68%
WACC (AT) 37.14% 11.07% 62.86% 4.76% 30% 6.21%
Financial Statement Forecasting:
Forecasting is the process of analyzing a company’s current and historical data to
determine their future trends. This is a good way to gain insight on the future
expectations of a company. Since these estimations are bases on historical fact and
cannot possibly take into consideration future market results, the results are the best
available guess. We will be forecasting out Sealed Air’s income statement, balance
sheet, and statement of cash flows ten years to predict their future earnings. We will
use trends, growth rates, profitability and capital structure ratios to compute the future
values.
Income Statement:
When forecasting financial statements in a prospective analysis, the income
statement is without question the most essential and significant item over all the other
statements. Since forecasting the income statement is the most imperative and critical,
it is essential that the assumptions that are used are firmly grounded in business reality
and logical probability, so that the future expectations can be reasonably estimated and
relatively simple to comprehend. To further illustrate the importance of the forecasted
income statement, we must note that many of the assumptions and figures used in this
analysis will flow into the forecasted balance sheet and forecasted cash flows.
Sealed Air 129
The first and single most critical assumption that we made in the prospective
financial forecast is net sales growth rate. By looking at the past 5 years of data, we
can see that net sales seem to fluctuate around an average of 7.75% yearly growth
rate. However, in our forecasted analysis we used an 8% yearly sales growth rate when
estimating total revenue. The reason we chose a slightly higher growth rate than our
average is because of the conclusions we made earlier relating to industry growth and
Sealed Air’s relative market share. When looking at the packaging and container
industry as a whole, it grew an average of 8.32% per year over the past 5 years. Given
this industry growth rate, we further assume that Sealed Air will be able to maintain
their relative market share of about 27.5%, which has been consistent this past decade.
Therefore, 8% seemed like a logical midpoint between the industry growth average and
the company growth average.
Another crucial assumption that we made was the growth rate for cost of goods
sold. As we mentioned earlier in the analysis of key success factors of this report, lower
input costs are a vital element in the cost leadership competitive business strategy.
Since input costs are identified as a key success factor for the packaging and container
industry, we must strictly use prospective information relating to the expected prices for
these raw materials. Since plastic polymers are an essential ingredient for an
overwhelming majority of the industry’s product line, we must consider estimates that
try to predict the future costs from the company’s plastic suppliers. Plastics are derived
from petroleum, which as we all know have recently been increasing dramatically in
price. The following is an article about one of Sealed Air’s largest supplier of plastics,
Huntsman Chemical Corporation.
“U.S. chemical maker Huntsman Corp said on Thursday it will raise prices up to
25 percent and impose an energy surcharge across a wide range of products. The
move, which is driven by a sustained increase in costs for energy, transportation and
raw materials, mirrors similar actions taken by other U.S. chemical makers like Dow
Chemical and Rohm and Haas. The price increases by Huntsman and its counterparts
are likely to pressure plastics packaging makers like Bemis Co, Sealed Air, and Pactiv
Sealed Air 130
Corp, which have in recent months already seen profits affected by rising resin costs”.
Source: Reuters via Yahoo! Finance
(http://biz.yahoo.com/rb/080529/huntsmancorp_prices.html?.v=1).
Presented below is a price history of the oil markets from 1994 to today. Notice how
since 2002 the price of oil has jumped by nearly 500% over the last 6 years; faster than
any other publicly traded commodity in history.
Source: http://octane.nmt.edu/gotech/Marketplace/Prices.aspx via Wikipedia.org
Due to the rapidly increasing prices of petroleum based products, we can safely
assume that the growth rate for cost of goods sold (COGS) will be relatively higher than
the sales growth rate. The problem that we are now presented with is by how much
should the COGS growth rate exceed total revenue growth rate? We decided to go with
Sealed Air 131
a conservative choice of 8.5%; a mere 50 basis points over our total sales growth rate.
The reason we didn’t choose a higher rate of 9% or 10% was because of the
uncertainty of the oil market. Many analysts have recently stated that the price of oil is
artificially too high and cannot be reasonably explained through the market’s supply and
demand curves. This over-inflated price has many economists claiming that there is a
“bubble” within the oil market and it is only a matter of time before it “bursts”, sending
prices falling back down to a market equilibrium level. Another factor to consider is the
potential availabilty of fuel alternatives such as ethanol, biodeisel, butanol, hydrogen,
biomass, and electric hybird vehicles that could significantly lower the demand for oil.
Given the relatively extreme volatility of the oil market and the considerable factors of
price on both oil and alternative fuels, we have decided that a cost of goods sold
growth rate of a modest 8.5% is a reasonable estimate for our forecast.
The next line item on the income statement that we forecasted was the gross
profit from sales, which is calculated by taking net sales minus the cost of goods sold.
As we mentioned earlier, the cost of goods sold growth rate is relatively higher than the
total revenue growth rate. Given these assumptions, we can expect that the gross profit
margin will steadily decrease although gross profits are shown to be increasing from
year to year. Therefore, it should be noted that a steadily decreasing profit margin
could potentially cause problems for Sealed Air in matters such as liquidity and overall
profitability.
An additonal aspect of the income statement that was forecasted out was the
perating profit, which is Net Sales minus cost of goods sold and selling, general, and
administrative expenses. We chose to forecast operating profit by Sealed Air’s average
operating profit margin of 13% of total net sales. The reason we decided to use an
operating profit margin rather than use the formula (Sales – COGS-SGA) was because
we could not reasonably estimate future SG&A expenses. Therefore, by applying a
profit margin to expected sales we can get a rough estimate of what to expect for
earnings before interest and taxes.
Sealed Air 132
The last income statement line item that we forecasted was the net income. To
determine net income, we would have to take operating profit and deduct both interest
and tax expenses. However, interest and tax are extremely difficult to predict given that
they often vary in relation to certain economic conditions. Therefore, we decided to
simply utilize our net profit margin to forecast our net income. Since the net profit
margin is derived from sales, we can conclude that net income will increase along with
net sales. However, we should note that we chose a growth rate of 7%. We chose 7%
because it is slightly less than the sales growth rate of 8%. Since the cost of goods sold
was increasing at a greater rate than sales, we could determine that the income profit
margin would steadily decrease from year to year, thus explaining why net income was
increasing at a significantly slower rate than sales.
Sealed Air 133
SEALED AIR CORPORATION AND SUBSIDIARIESIncome Statement(in millions, except per share amounts)
20022003
20042005
20062007
20082009
20102011
20122013
20142015
20162017
2018Net sales
3,204.30$
3,531.90$
3,798.10$
4,085.10$
4,327.90$
4,651.20$
5,023.30$
5,425.16$
5,859.17$
6,327.91$
6,834.14$
7,380.87$
7,971.34$
8,609.05$
9,297.77$
10,041.59$
10,844.92$
Cost of sales2,146.70
$ 2,419.10
$ 2,636.00
$ 2,927.10
$ 3,087.80
$ 3,350.10
$ 3,634.86
$ 3,943.82
$ 4,279.05
$ 4,642.77
$ 5,037.40
$ 5,465.58
$ 5,930.15
$ 6,434.22
$ 6,981.13
$ 7,574.52
$ 8,218.35
$ Gross profit
1,057.60$
1,112.80$
1,162.10$
1,158.00$
1,240.10$
1,301.10$
1,388.44$
1,481.34$
1,580.13$
1,685.14$
1,796.74$
1,915.29$
2,041.19$
2,174.83$
2,316.65$
2,467.07$
2,626.56$
Marketing, administrative and development expenses541.90
$ 572.40
$ 626.10
$ 645.90
$ 701.10
$ 750.20
$ Restructuring and other charges
(1.30)$
(0.50)$
33.00$
1.70$
12.90$
1.60$
Operating profit517.00
$ 540.90
$ 503.00
$ 510.40
$ 526.10
$ 549.30
$ 583.14
$ 622.16
$ 663.65
$ 707.76
$ 754.63
$ 804.42
$ 857.30
$ 913.43
$ 972.99
$ 1,036.17
$ 1,103.16
$ Interest expense
(65.90)$
(136.00)$
(153.70)$
(149.70)$
(148.00)$
(140.60)$
Gain on sale of equity method investment-
$ (33.60)
$ (32.20)
$ -
$ -
$ 35.30
$ Other income, net
7.10$
8.40$
7.80$
15.90$
22.00$
12.00$
Earnings before income tax provision(391.90)
$ 376.90
$ 322.90
$ 376.60
$ 400.10
$ 456.00
$ Income tax provision
(82.80)$
136.50$
107.30$
120.80$
126.00$
103.00$
Net earnings(309.10)
$ 240.40
$ 215.60
$ 255.80
$ 274.10
$ 353.00
$ 377.71
$ 404.15
$ 432.44
$ 462.71
$ 495.10
$ 529.76
$ 566.84
$ 606.52
$ 648.98
$ 694.40
$ 743.01
$ Net earnings per common share:Basic
(4.20)$
2.21$
2.56$
1.56$
1.70$
2.21$
Diluted(4.30)
$ 1.97
$ 2.25
$ 1.35
$ 1.47
$ 1.89
$
Actual Financial StatementsForecasted Financial Statements
Sealed Air 134
SEALED AIR CORPORATION AND SUBSIDIARIESCommon Size Income Statement
20032004
20052006
20072008
20092010
20112012
20132014
20152016
2018Sales Growth
10.22%7.54%
7.56%5.94%
7.47%8.00%
8.00%8.00%
8.00%8.00%
8.00%8.00%
8.00%8.00%
8.00%Net sales
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%Cost of sales
68.49%69.40%
71.65%71.35%
72.03%72.36%
72.70%73.03%
73.03%73.37%
73.71%74.05%
74.39%74.74%
75.08%Gross profit
31.51%30.60%
28.35%28.65%
27.97%27.64%
27.30%26.97%
26.97%26.63%
26.29%25.95%
25.61%25.26%
24.92%SG&A expenses
16.21%16.48%
15.81%16.20%
16.13%Operating profit
15.31%13.24%
12.49%12.16%
11.81%11.61%
11.47%11.33%
11.33%11.18%
11.04%10.90%
10.75%10.61%
10.46%Interest expense
3.85%4.05%
3.66%3.42%
3.02%Income before taxes
10.67%8.50%
9.22%9.42%
9.80%Income tax provision
3.86%2.83%
2.96%2.91%
2.21%Net Income
6.81%5.68%
6.26%6.33%
7.59%7.52%
7.45%7.38%
7.38%7.31%
7.24%7.18%
7.11%7.05%
6.98%
Actual Financial StatementsForecasted Financial Statements
Sealed Air 135
Restated Income Statement:
Now that we have seen the forecast for the original income statement, we now
focus our attention on the revised income statement. The only difference between the
original income statement and the revised version was the impairment for goodwill.
While the impairment for goodwill significantly lowered Sealed Air’s net income, it had
absolutely no effect on our forecasts. All of the impaired balance was amortized
between the years of 2002 to 2007. Since the impairment has essentially been written
off, we still acknowledge the fact that goodwill will continuously be inflated by
management. However, since we cannot reasonably forecast expected goodwill
impairment, we will not forecast a complete variable. Therefore, the forecasted net
earnings of both versions will be identical and unaltered.
Sealed Air 136
SEALED AIR CORPORATION AND SUBSIDIARIESRestated Income Statement(in millions, except per share amounts)
20032004
20052006
20072008
20092010
20112012
20132014
20152016
20172018
Net sales3,531.90
$ 3,798.10
$ 4,085.10
$ 4,327.90
$ 4,651.20
$ 5,023.30
$ 5,425.16
$ 5,859.17
$ 6,327.91
$ 6,834.14
$ 7,380.87
$ 7,971.34
$ 8,609.05
$ 9,297.77
$ 10,041.59
$ 10,844.92
$ Cost of sales
2,419.10$
2,636.00$
2,927.10$
3,087.80$
3,350.10$
3,634.86$
3,943.82$
4,279.05$
4,642.77$
5,037.40$
5,465.58$
5,930.15$
6,434.22$
6,981.13$
7,574.52$
8,218.35$
Gross profit1,112.80
$ 1,162.10
$ 1,158.00
$ 1,240.10
$ 1,301.10
$ 1,388.44
$ 1,481.34
$ 1,580.13
$ 1,685.14
$ 1,796.74
$ 1,915.29
$ 2,041.19
$ 2,174.83
$ 2,316.65
$ 2,467.07
$ 2,626.56
$ Marketing, administrative and development expenses
572.40$
626.10$
645.90$
701.10$
750.20$
Restructuring and other charges(0.50)
$ 33.00
$ 1.70
$ 12.90
$ 1.60
$ Operating profit
540.90$
503.00$
510.40$
526.10$
549.30$
583.14$
622.16$
663.65$
707.76$
754.63$
804.42$
857.30$
913.43$
972.99$
1,036.17$
1,103.16$
Interest expense(136.00)
$ (153.70)
$ (149.70)
$ (148.00)
$ (140.60)
$ Impairment of Goodwill Expense
310.80$
224.30$
193.60$
164.50$
134.20$
Gain on sale of equity method investment(33.60)
$ (32.20)
$ -
$ -
$ 35.30
$ Other income, net
8.40$
7.80$
15.90$
22.00$
12.00$
Earnings before income tax provision376.90
$ 322.90
$ 376.60
$ 400.10
$ 456.00
$ Income tax provision
136.50$
107.30$
120.80$
126.00$
103.00$
Net earnings(70.40)
$ (8.70)
$ 62.20
$ 109.60
$ 218.80
$ 377.71
$ 404.15
$ 432.44
$ 462.71
$ 495.10
$ 529.76
$ 566.84
$ 606.52
$ 648.98
$ 694.40
$ 743.01
$
Forecasted Financial StatementsActual Financial Statements
Sealed Air 137
SEALED AIR CORPORATION AND SUBSIDIARIESRestated Common Size Income Statement
20032004
20052006
20072008
20092010
20112012
20132014
20152016
20172018
Sales Growth10.22%
7.54%7.56%
5.94%7.47%
8.00%8.00%
8.00%8.00%
8.00%8.00%
8.00%8.00%
8.00%8.00%
8.00%Net sales
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
Cost of sales68.49%
69.40%71.65%
71.35%72.03%
72.36%72.70%
73.03%73.37%
73.71%74.05%
74.39%74.74%
75.08%75.43%
75.78%Gross profit
31.51%30.60%
28.35%28.65%
27.97%27.64%
27.30%26.97%
26.63%26.29%
25.95%25.61%
25.26%24.92%
24.57%24.22%
SG&A expenses16.21%
16.48%15.81%
16.20%16.13%
Operating profit15.31%
13.24%12.49%
12.16%11.81%
11.61%11.47%
11.33%11.18%
11.04%10.90%
10.75%10.61%
10.46%10.32%
10.17%Impairment Expense
8.80%5.91%
4.74%3.80%
2.89%Interest expense
3.85%4.05%
3.66%3.42%
3.02%Income before taxes
10.67%8.50%
9.22%9.42%
9.80%Income tax provision
3.86%2.83%
2.96%2.91%
2.21%Net Income
‐1.99%‐0.23%
1.52%2.53%
4.70%7.52%
7.45%7.38%
7.31%7.24%
7.18%7.11%
7.05%6.98%
6.92%6.85%
Actual Financial StatementsForecasted Financial Statements
Sealed Air 138
Balance Sheet:
The balance sheet is a form of financial statement that states the company’s
assets and how they obtained them through liabilities and equity. The framework for
forecasting is established from estimating future sales growth on the income statement.
To link the income statement to the balance sheet we use asset turnover. By obtaining
the forecasted sales from the income statement and plugging them into Sealed Air’s
appropriate asset turnover ratio of .86, we were able to obtain a forecast for future
assets. We used .86 for our asset turnover because it fit appropriately with the current
trend along with being the mean of our asset turnovers for the past 5 years.
First, after establishing our total assets for the year we can forecast non-current
assets as a percentage of total assets. We decided that our noncurrent assets would
level out to a percentage of approximately 65% of our total assets. We feel that for
Sealed Air finds this is a comfortable percentage of non-current assets in the packaging
industry. Next, we derived current assets by subtracting noncurrent assets from total
assets. Now that we have current assets, we can use it to establish a forecast for
current liabilities. We can forecast the current liabilities by using an established current
ratio and our previously forecasted current assets. The current ratio that we
established credible was 1.19 because of the previous years with higher emphasis
placed on the last two year’s current ratio.
Next, we move to the shareholder’s equity portion of the balance sheet to
forecast retained earnings and shareholder’s equity. For forecasting retained earnings,
we simply used the previously forecasted numbers and plug them into the retained
earnings formula (Retained Earnings=Beginning Balance of Retained Earning+Net
Income-Dividends). We pulled the net income from our previously forecasted income
statement and dividends from our statement of cash flows. Once we have retained
earnings we can add the change in retained earnings to our previously held
stockholder’s equity. This calculation creates the forecasted total stockholder’s equity.
Sealed Air 139
Now that we established stockholder’s equity and assets we can find our total
liabilities by using the classic balance sheet formula (assets=liabilities+equity). This has
to be true in order for our balance sheet to balance. Now that we have established
current liabilities from the current ratio and total liability, we can subtract the current
liabilities from the total liabilities to get our noncurrent liabilities. Other forecasts that
were made on the balances sheet were inventory and accounts receivable. Accounts
Receivable was established by calculating 41% of current assets. We used 41% due to
the steady trend shown on the common sized balance sheet in the previous years. We
expect our inventories to keep a steady 8.5% increase because it has been growing at
a slightly higher rate than our growth rate. Applying these forecasting tools allows
investors to get a future look at how a company should perform, based upon the
previous five years.
Sealed Air 140
SEALED AIR CO
RPORATIO
N AN
D SUBSID
IARIESBalance Sheet(in m
illions, except share data)2003
20042005
20062007
20082009
20102011
20122013
20142015
20162017
AssetsCurrent assets:Cash and cash equivalents
297.80$
358.00$
455.80$
373.10$
430.30$
Short-term investm
ents-available-for-sale securities67.20
$ 54.10
$ 44.10
$ 33.90
$ -
$ Receivables, net of allow
ance for doubtful accounts of$16.2 in 2007 and $17.5 in 2006
615.20$
662.50$
674.00$
721.30$
789.80$
887.50$
958.50$
1,035.18$
1,118.00$
1,207.44$
1,304.03$
1,408.35$
1,521.02$
1,642.70$
1,774.12$
Inventories371.20
$ 417.90
$ 409.10
$ 509.40
$ 581.70
$ 632.15
$ 685.88
$ 744.18
$ 807.44
$ 876.07
$ 950.54
$ 1,031.33
$ 1,118.99
$ 1,214.11
$ 1,317.31
$ Prepaid expenses and other current assets
18.80$
17.00$
11.40$
18.20$
21.90$
Deferred tax assets
100.60$
101.70$
101.00$
100.80$
112.40$
- - - - - - - - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - - -
- - - - - - Total current assets
1,470.80$
1,611.20$
1,695.40$
1,756.70$
1,936.10$
2,164.64$
2,337.81$
2,524.83$
2,726.82$
2,944.97$
3,180.56$
3,435.01$
3,709.81$
4,006.60$
4,327.12$
Property and equipment, net
1,042.40$
1,008.60$
911.20$
970.10$
1,080.10$
Goodwill
1,939.50$
1,953.40$
1,908.80$
1,957.10$
1,969.70$
Non-current deferred tax assets42.00
$ 66.30
$ 130.40
$ 175.40
$ 163.20
$ Non-current investm
ents-available-for-sale securities-
$ 40.80
$ O
ther assets, net209.40
$ 215.50
$ 218.40
$ 161.60
$ 248.40
$ Total Non-current assets
3,233.30$
3,243.80$
3,168.80$
3,264.20$
3,502.20$
4,020.04$
4,341.65$
4,688.98$
5,064.10$
5,469.22$
5,906.76$
6,379.30$
6,889.65$
7,440.82$
8,036.09$
- - - - - - - - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - - -
- - - - - - Total assets
4,704.10$
4,855.00$
4,864.20$
5,020.90$
5,438.30$
6,184.68$
6,679.46$
7,213.81$
7,790.92$
8,414.19$
9,087.33$
9,814.31$
10,599.46$
11,447.41$
12,363.21$
- - - - - - - - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - - -
- - - - - - Liabilities and shareholders' equityCurrent liabilities:Short-term
borrowings
18.20$
19.80$
21.80$
20.20$
36.50$
Current portion of long-term debt
2.40$
3.80$
241.40$
5.50$
303.70$
Accounts payable191.70
$ 248.50
$ 250.30
$ 283.90
$ 316.30
$ 363.80
$ 392.91
$ 424.34
$ 458.29
$ 494.95
$ 534.55
$ 577.31
$ 623.50
$ 673.38
$ 727.25
$ D
eferred tax liabilities5.80
$ 5.70
$ 4.60
$ 7.80
$ 12.10
$ Asbestos settlem
ent liability512.50
$ 512.50
$ 512.50
$ 512.50
$ 512.50
$ O
ther current liabilities459.80
$ 513.50
$ 502.90
$ 576.20
$ 560.50
$ - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - -
Total current liabilities1,190.40
$ 1,303.80
$ 1,533.50
$ 1,406.10
$ 1,741.60
$ 1,819.02
$ 1,964.55
$ 2,121.71
$ 2,291.45
$ 2,474.76
$ 2,672.74
$ 2,886.56
$ 3,117.49
$ 3,366.89
$ 3,636.24
$ Long-term
debt, less current portion2,259.80
$ 2,088.00
$ 1,813.00
$ 1,826.60
$ 1,531.60
$ Non-current deferred tax liabilities
34.90$
26.90$
23.90$
7.60$
9.90$
Other liabilities
95.40$
102.80$
101.70$
125.80$
135.60$
Total Non-current Liabilities2,390.10
$ 2,217.70
$ 1,938.60
$ 1,960.00
$ 1,677.10
$ 2,034.45
$ 2,050.28
$ 2,070.71
$ 2,096.34
$ 2,127.84
$ 2,165.94
$ 2,211.46
$ 2,265.31
$ 2,328.46
$ 2,402.02
$ - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - -
Total liabilities3,580.50
$ 3,521.50
$ 3,472.10
$ 3,366.10
$ 3,418.70
$ 3,853.47
$ 4,014.82
$ 4,192.42
$ 4,387.78
$ 4,602.60
$ 4,838.68
$ 5,098.03
$ 5,382.79
$ 5,695.34
$ 6,038.25
$ Com
mitm
ents and contingencies - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - -
Shareholders' equity:Preferred stock, $0.10 par value per share, 50,000,000shares authorized; no shares issued in 2007 and 2006
-$
-$
-$
-$
-$
Comm
on stock, $0.10 par value per share, 400,000,000 sharesauthorized; shares issued: 167,741,721 in 2007 and86,488,913 in 2006; shares outstanding; 161,627,030 in 2007and 80,655,028 in 2006
8.60$
8.60$
8.60$
8.60$
16.80$
Comm
on stock reserved for issuance related to asbestossettlem
ent, $0.10 par value per share, 18,000,000 shares in2007 and 9,000,000 shares in 2006
0.90$
0.90$
0.90$
0.90$
1.80$
Additional paid-in capital1,046.90
$ 1,059.80
$ 1,075.50
$ 1,075.90
$ 1,086.10
$ Retained earnings
243.70$
459.30$
715.10$
972.40$
1,260.80$
1,572.41$
1,905.83$
2,262.60$
2,644.33$
3,052.79$
3,489.84$
3,957.49$
4,457.86$
4,993.27$
5,566.15$
- - - - - - - - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - - -
- - - - - - 1,283.80
$ 1,510.70
$ 1,782.30
$ 2,057.80
$ 2,365.50
$ - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - - - -
Unamortized pension item
s, net of taxes(1.60)
$ (3.30)
$ (5.30)
$ (60.20)
$ (58.20)
$ Cum
ulative translation adjustment
(147.00)$
(77.80)$
(169.70)$
(70.70)$
(4.00)$
Unrecognized gain on derivative instruments, net of taxes
8.00$
7.60$
6.80$
6.10$
5.60$
Unrecognized losses on available-for-sale securities, netof taxes
-$
(2.40)$
- - - - - - - - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - Accum
ulated other comprehensive loss
(140.60)$
(73.50)$
(168.20)$
(124.80)$
(59.00)$
- - - - - - - - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - Com
mon stock in treasury 6,114,691 shares in 2007 and
5,823,885 shares in 2006(19.60)
$ (103.70)
$ (222.00)
$ (278.20)
$ (286.90)
$ - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - -
Total shareholders' equity1,123.60
$ 1,333.50
$ 1,392.10
$ 1,654.80
$ 2,019.60
$ 2,331.21
$ 2,664.63
$ 3,021.40
$ 3,403.13
$ 3,811.59
$ 4,248.64
$ 4,716.29
$ 5,216.66
$ 5,752.07
$ 6,324.95
$ - - - - - - -
- - - - - - - - - - - - - -
- - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - -
Total liabilities and shareholders' equity4,704.10
$ 4,855.00
$ 4,864.20
$ 5,020.90
$ 5,438.30
$ 6,184.68
$ 6,679.46
$ 7,213.81
$ 7,790.92
$ 8,414.19
$ 9,087.33
$ 9,814.31
$ 10,599.46
$ 11,447.41
$ 12,363.21
$
Actual Financial Statements
Forecasted Financial Statements
Sealed Air 141
SEALED AIR CORPORATION AND SUBSIDIARIESCommon Size Balance Sheet
20032004
20052006
20072008
20092010
20112012
20132014
20152016
2017Cash and equivalents
20%22%
27%21%
22%Inventories
25%26%
24%29%
30%29%
29%29%
30%30%
30%30%
30%30%
30%Net Receivables
42%41%
40%41%
41%41%
41%41%
41%41%
41%41%
41%41%
41%Prepaid expenses
1%1%
1%1%
1%Deferred tax assets
7%6%
6%6%
6%Short Term Investments
5%3%
3%2%
NATotal current assets
31%33%
35%35%
36%35%
35%35%
35%35%
35%35%
35%35%
35%Property and equipment
32%31%
29%30%
31%Goodwill
60%60%
60%60%
56%Other assets
6%7%
7%5%
7%non-current deferred
1%2%
4%5%
5%non-current investments
NANA
NANA
1%Total long-term assets
69%67%
65%65%
64%65%
65%65%
65%65%
65%65%
65%65%
65%Total assets
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%Short-term borrowings
2%2%
1%1%
2%Current portion of L.T. debt
0%0%
16%0%
17%Accounts payable
16%19%
16%20%
18%Deferred tax liabilities
0%0%
0%1%
1%Asbestos settlement liability
43%39%
33%36%
29%Other current liabilities
39%39%
33%41%
32%Total current liabilities
33%37%
44%42%
51%47%
49%51%
52%54%
55%57%
58%59%
60%Long-term debt, less current portion
95%94%
94%93%
91%Non-current deferred tax liabilities
1%1%
1%0%
1%Other liabilities
4%5%
5%6%
8%Total LT liabilities
67%63%
56%58%
49%53%
51%49%
48%46%
45%43%
42%41%
40%Total Liabilities
100%100%
100%100%
100%62%
60%58%
56%55%
53%52%
51%50%
49%Common Stock
1%1%
1%1%
1%Stock Reserves
0%0%
0%0%
0%Paid In Capital
93%79%
77%65%
54%Retained Earnings
22%34%
51%59%
62%67%
72%75%
78%80%
82%84%
85%87%
88%Equity Before Losses
114%113%
128%124%
117%Unamortized pension items, net of taxes
0%0%
0%-4%
-3%Cumulative translation adjustment
-13%-6%
-12%-4%
0%Unrecognized gain on derivative instruments, net of taxes
1%1%
0%0%
0%Accumulated other comprehensive loss
-13%-6%
-12%-8%
-3%Total Equity
100%100%
100%100%
100%38%
40%42%
44%45%
47%48%
49%50%
51%Total liabilities and shareholders' equity
100%100%
100%100%
100%100%
100%100%
100%100%
Actual Financial StatementsForecasted Financial Statements
Sealed Air 142
Restated Balance Sheet:
Sealed Air reported goodwill of 36% of total assets. This raised a red flag and
we decided that restating our financials would aid us in valuing the company. We
decided to impair Sealed Air’s goodwill at 20% per year which affected assets and
shareholder’s equity. Shareholder’s equity was reduced because of the decrease in net
earnings that occurred over the restatement. The decrease in net earnings will cause
retained earnings to fall, which is a component of shareholder’s equity. The assets of
goodwill were affected as well. The same .86 from the total asset turnover ratio that
was used in the stated balance sheet forecasting was used in the revised balance sheet
as well, due to the strong trend in asset balances. We feel that even though the assets,
such as goodwill, were impaired that they will steadily increase in the forecasted years
because of acquisitions and total asset increases to support growing sales production.
In correlation to total asset forecasting on the revised balance sheet, the non-current
assets grew at the same 65% of total assets. In current assets, net receivables was
forecasted to increase at 41% of total current assets. Inventories were assumed to
grow at same amount as our forecasted sales growth. Our conclusions for this are that
sales could only grow at the same rate that goods were acquired. The sales rate is
appropriate for many reasons, such as, it would be difficult to maintain efficiency if
sales were increasing but inventory was not present. Also, it would be costly to have
too much inventory on hand, thus causing costly storage problems. Third, having too
high an inventory growth rate make increase the risk of unsold inventory susceptible to
obsolesces or theft. We considered increasing inventory by a rate that was congruent
to inventory turnover but the lack of consistency in the ratios made it difficult to
forecast.
In addition to total, current, and noncurrent assets being forecasted on the
balance sheet, we forecasted total liabilities, current liabilities, and noncurrent liabilities.
Total current liabilities were found by dividing total assets by 1 plus 19%. Noncurrent
liabilities were forecasted by subtracting current liabilities from total liabilities. In
Sealed Air 143
essences since we already had both current and total liabilities forecasted, this became
a plug figure. Furthermore, a total liability was forecasted by subtracting total assets
from total stockholders’ equity.
After forecasting total, current, and noncurrent liabilities stock holders equity was
forecasted. The first part of stockholders equity that was forecasted was the retained
earnings portion. Retained earnings were simple computations to forecast. The way we
arrived at our values was by taking our beginning balance in retained earnings from our
restated income statement and adding our net income and subtracting our dividends
(from our revised statement of cash flows). Our ending balance was calculated and
then used as our beginning balance for the next years retained earnings. This is one of
the reasons why the balance sheet is the second most accurate statement to forecast
because of its tight correlations to the income statement. In addition to retained
earnings, we forecasted our total stock holder’s equity. Stockholders’ equity was
calculated by taking our 2007 value and adding the difference in retained earnings of
the current and previous years. This may not seem like the most accurate forecast, but
it is the most stable and consistent over time. Finally after we were able to forecast our
total stockholders’ equity we were able to forecast our total liabilities and stock holders
equity by adding together our two previous forecast for stockholders equity and total
liabilities.
In conclusion, forecasting both the stated balance sheet and restated balance
sheet will help investors accurately view future activities of a firm. Through ratio and
industry analysis we arrived at what we feel is the most accurate and stable portrayal of
asset, liability, and equity values for the next ten years for both the restated versions
and stated versions of Sealed Air’s financial balance sheet.
Sealed Air 144
SEALED AIR CO
RPORATIO
N AN
D SU
BSIDIARIES
Restated Balance Sheet(in m
illions, except share data)2003
20042005
20062007
20082009
20102011
20122013
20142015
20162017
2018AssetsCurrent assets:Cash and cash equivalents
297.80$
358.00$
455.80$
373.10$
430.30$
Short-term investm
ents-available-for-sale securities67.20
$ 54.10
$ 44.10
$ 33.90
$ -
$ Receivables, net of allow
ance for doubtful accounts of$16.2 in 2007 and $17.5 in 2006
615.20$
662.50$
674.00$
721.30$
789.80$
676.97$
731.12$
789.61$
852.78$
921.00$
994.68$
1,074.26$
1,160.20$
1,253.02$
1,353.26$
1,461.52$
Inventories371.20
$ 417.90
$ 409.10
$ 509.40
$ 581.70
$ 632.15
$ 685.88
$ 744.18
$ 807.44
$ 876.07
$ 950.54
$ 1,031.33
$ 1,118.99
$ 1,214.11
$ 1,317.31
$ 1,429.28
$ Prepaid expenses and other current assets
18.80$
17.00$
11.40$
18.20$
21.90$
Deferred tax assets
100.60$
101.70$
101.00$
100.80$
112.40$
- - - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - - - - -
Total current assets1,470.80
$ 1,611.20
$ 1,695.40
$ 1,756.70
$ 1,936.10
$ 1,651.14
$ 1,783.23
$ 1,925.88
$ 2,079.96
$ 2,246.35
$ 2,426.06
$ 2,620.14
$ 2,829.76
$ 3,056.14
$ 3,300.63
$ 3,564.68
$ Property and equipm
ent, net1,042.40
$ 1,008.60
$ 911.20
$ 970.10
$ 1,080.10
$ G
oodwill
1,243.40$
977.50$
774.60$
658.30$
536.80$
Non-current deferred tax assets
42.00$
66.30$
130.40$
175.40$
163.20$
Non-current investm
ents-available-for-sale securities-
$ 40.80
$ O
ther assets, net209.40
$ 215.50
$ 218.40
$ 161.60
$ 248.40
$ Total N
on-current assets2,537.20
$ 2,267.90
$ 2,034.60
$ 1,965.40
$ 2,069.30
$ 3,066.39
$ 3,311.71
$ 3,576.64
$ 3,862.77
$ 4,171.80
$ 4,505.54
$ 4,865.98
$ 5,255.26
$ 5,675.68
$ 6,129.74
$ 6,620.12
$ - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - Total assets
4,008.00$
3,879.10$
3,730.00$
3,722.10$
4,005.40$
4,717.53$
5,094.93$
5,502.53$
5,942.73$
6,418.15$
6,931.60$
7,486.13$
8,085.02$
8,731.82$
9,430.36$
10,184.79$
- - - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - - - - -
Liabilities and shareholders' equityCurrent liabilities:Short-term
borrowings
18.20$
19.80$
21.80$
20.20$
36.50$
Current portion of long-term debt
2.40$
3.80$
241.40$
5.50$
303.70$
Accounts payable191.70
$ 248.50
$ 250.30
$ 283.90
$ 316.30
$ D
eferred tax liabilities5.80
$ 5.70
$ 4.60
$ 7.80
$ 12.10
$ Asbestos settlem
ent liability512.50
$ 512.50
$ 512.50
$ 512.50
$ 512.50
$ O
ther current liabilities459.80
$ 513.50
$ 502.90
$ 576.20
$ 560.50
$ - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - Total current liabilities
1,190.40$
1,303.80$
1,533.50$
1,406.10$
1,741.60$
1,387.51$
1,498.51$
1,618.39$
1,747.86$
1,887.69$
2,038.71$
2,201.80$
2,377.95$
2,568.18$
2,773.64$
2,995.53$
Long-term debt, less current portion
2,259.80$
2,088.00$
1,813.00$
1,826.60$
1,531.60$
Non-current deferred tax liabilities
34.90$
26.90$
23.90$
7.60$
9.90$
Other liabilities
95.40$
102.80$
101.70$
125.80$
135.60$
Total Non-current assets
2,390.10$
2,217.70$
1,938.60$
1,960.00$
1,677.10$
2,431.71$
2,364.69$
2,295.64$
2,224.63$
2,151.77$
2,077.15$
2,000.94$
1,923.31$
1,844.47$
1,764.67$
1,684.23$
- - - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - - - - -
Total liabilities3,580.50
$ 3,521.50
$ 3,472.10
$ 3,366.10
$ 3,418.70
$ 3,819.22
$ 3,863.20
$ 3,914.03
$ 3,972.50
$ 4,039.46
$ 4,115.86
$ 4,202.74
$ 4,301.25
$ 4,412.65
$ 4,538.31
$ 4,679.75
$ Com
mitm
ents and contingencies - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - Shareholders' equity:Preferred stock, $0.10 par value per share, 50,000,000shares authorized; no shares issued in 2007 and 2006
-$
-$
-$
-$
-$
Comm
on stock, $0.10 par value per share, 400,000,000 sharesauthorized; shares issued: 167,741,721 in 2007 and86,488,913 in 2006; shares outstanding; 161,627,030 in 2007and 80,655,028 in 2006
8.60$
8.60$
8.60$
8.60$
16.80$
Comm
on stock reserved for issuance related to asbestossettlem
ent, $0.10 par value per share, 18,000,000 shares in2007 and 9,000,000 shares in 2006
0.90$
0.90$
0.90$
0.90$
1.80$
Additional paid-in capital1,046.90
$ 1,059.80
$ 1,075.50
$ 1,075.90
$ 1,086.10
$ Retained earnings
(328.10)$
(461.00)$
(268.70)$
(201.60)$
(113.10)$
198.51$
531.93$
888.70$
1,270.43$
1,678.89$
2,115.94$
2,583.59$
3,083.96$
3,619.37$
4,192.25$
4,805.24$
- - - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - - - - -
728.30$
608.30$
816.30$
883.80$
991.60$
- - - - - - - - - - - -
- - - - - - - - - - -
- - - - - - Unam
ortized pension items, net of taxes
(1.60)$
(3.30)$
(5.30)$
(60.20)$
(58.20)$
Cumulative translation adjustm
ent(147.00)
$ (77.80)
$ (169.70)
$ (70.70)
$ (4.00)
$ Unrecognized gain on derivative instrum
ents, net of taxes8.00
$ 7.60
$ 6.80
$ 6.10
$ 5.60
$ Unrecognized losses on available-for-sale securities, netof taxes
-$
(2.40)$
- - - - - - - - - - - -
- - - - - - - - - - -
- - - - - - Accum
ulated other comprehensive loss
(140.60)$
(73.50)$
(168.20)$
(124.80)$
(59.00)$
- - - - - - - - - - - -
- - - - - - - - - - -
- - - - - - Com
mon stock in treasury 6,114,691 shares in 2007 and
5,823,885 shares in 2006(19.60)
$ (103.70)
$ (222.00)
$ (278.20)
$ (286.90)
$ - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - Total shareholders' equity
427.50$
357.60$
257.90$
356.00$
586.70$
898.31$
1,231.73$
1,588.50$
1,970.23$
2,378.69$
2,815.74$
3,283.39$
3,783.76$
4,319.17$
4,892.05$
5,505.04$
- - - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - - - -
- - - - - - - - - - - - -
- - - - - - - - - - - - -
Total liabilities and shareholders' equity4,008.00
$ 3,879.10
$ 3,730.00
$ 3,722.10
$ 4,005.40
$ 4,717.53
$ 5,094.93
$ 5,502.53
$ 5,942.73
$ 6,418.15
$ 6,931.60
$ 7,486.13
$ 8,085.02
$ 8,731.82
$ 9,430.36
$ 10,184.79
$
Actual Financial Statements
Forecasted Financial Statements
Sealed Air 145
SEALED AIR CORPORATION AND SUBSIDIARIESRestated Common Size Balance Sheet
20032004
20052006
20072008
20092010
20112012
20132014
20152016
20172018
Cash and equivalents20%
22%27%
21%22%
Inventories25%
26%24%
29%30%
38%38%
39%39%
39%39%
39%40%
40%40%
40%Net Receivables
42%41%
40%41%
41%41%
41%41%
41%41%
41%41%
41%41%
41%41%
Prepaid expenses1%
1%1%
1%1%
Deferred tax assets7%
6%6%
6%6%
Short Term Investments5%
3%3%
2%NA
Total current assets31%
33%35%
35%36%
35%35%
35%35%
35%35%
35%35%
35%35%
35%Property and equipment
32%31%
29%30%
31%Goodwill
42%32%
26%21%
16%Other assets
6%7%
7%5%
7%non-current deferred
1%2%
4%5%
5%non-current investments
NANA
NANA
1%Total long-term assets
67%65%
64%64%
63%65%
65%65%
65%65%
65%65%
65%65%
65%65%
Total assets100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%Short-term borrowings
2%2%
1%1%
2%Current portion of L.T. debt
0%0%
16%0%
17%Accounts payable
16%19%
16%20%
18%Deferred tax liabilities
0%0%
0%1%
1%Asbestos settlement liability
43%39%
33%36%
29%Other current liabilities
39%39%
33%41%
32%Total current liabilities
33%37%
44%42%
51%36%
39%41%
44%47%
50%52%
55%58%
61%64%
Long-term debt, less current portion95%
94%94%
93%91%
Non-current deferred tax liabilities1%
1%1%
0%1%
Other liabilities4%
5%5%
6%8%
Total LT liabilities67%
63%56%
58%49%
64%61%
59%56%
53%50%
48%45%
42%39%
36%Total Liabilities
100%100%
100%100%
100%81%
76%71%
67%63%
59%56%
53%51%
48%46%
Common Stock1%
1%1%
1%1%
Stock Reserves0%
0%0%
0%0%
Paid In Capital93%
79%77%
65%54%
Retained Earnings-6%
16%39%
49%56%
22%43%
56%64%
71%75%
79%82%
84%86%
87%Equity Before Losses
114%113%
128%124%
117%Unamortized pension items, net of taxes
0%0%
0%-4%
-3%Cumulative translation adjustment
-13%-6%
-12%-4%
0%Unrecognized gain on derivative instruments, net of taxes
1%1%
0%0%
0%Accumulated other comprehensive loss
-13%-6%
-12%-8%
-3%Total Equity
100%100%
100%100%
100%19%
24%29%
33%37%
41%44%
47%49%
52%54%
Total liabilities and shareholders' equity100%
100%100%
100%100%
100%100%
100%100%
100%100%
Actual Financial StatementsForecasted Financial Statements
Sealed Air 146
Statement of Cash Flows:
The statement of cash flows proves to be the most difficult and inaccurate
financial statement to forecast because of the unpredictability from year to year.
Another reason it is difficult to forecast the statement of cash flows is due to the lack of
correlation of dependent variables. Although it is the most inaccurate statement it is still
important for investors to analyze. The information presented in the cash flow
statement presents investors with three main segments, including cash flow from
operations, cash flow from investing activities, and cash flow from financing activities.
Cash flow from operations is important to consider because it indicates the efficiency of
a firm. Furthermore, the financing portion of the cash flow statement tells investors
whether a firm will be attaining more debt to further continuing and future operations.
In our forecasting of Sealed Air’s statement of cash flows, we looked for stable
and reliable patterns to base our estimations of growth or decline on. For the cash flow
from operations we found it most suitable to use cash flow from operating activities
over operating income of the previous five years to calculate a stable trend. Our
CFFO/OI trends indicated that near 8% was a reasonable estimate to grow our net cash
provided by operating activities. In addition to the operating cash flow section, net
earnings were forecasted by a net income derivative of 7%. Following our operating
section, the investing section was forecasted. We felt that if operating activities were to
increase by 8% that the firm could use the same growth rate to pour back into their
investing activities. We chose this assumption because we believe that SEE is on a path
to further their current investing relations and 8% would allow for a modest increase.
In addition to forecasting our net investing cash flows, we attempted to forecast our
net financing cash flow. Financing cash flow presented the largest amount of inaccuracy
in the statement of cash flows. There was no detectable pattern in our analysis. We felt
that we could not even slightly portray future growth of this sector without further
information that was unattainable. Furthermore, we felt that it would be a
disadvantage to try to forecast these numbers and lead investors astray due to arbitrary
Sealed Air 147
inaccurate forecasting for this segment. This relates back to earlier statements about
the difficulty and unstable predictions. The only portion of the financing cash flows that
was able to be forecasted was the dividend growth. Dividend growth was forecasted as
a portion of net earnings. As net earnings continued to grow, we felt there would be a
steady increase in dividends of 17.5%. After looking at the previous five year trends
this may seem like a large increase, but SEE continues to attain larger net earnings. As
earnings grow, the firm will be pressured to give larger portions back to shareholders.
Sealed Air 148
SEALED AIR CORPORATION AND SUBSIDIARIESStatem
ent of Cash Flows
(in millions)
20032004
20052006
20072008
20092010
20112012
20132014
20152016
20172018
Cash flows from
operating activities:Net earnings
240.40$
215.60$
255.80$
274.10$
353.00$
377.71$
404.15$
432.44$
462.71$
495.10$
529.76$
566.84$
606.52$
648.98$
694.40$
743.01$
Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation and am
ortization154.10
$ 159.60
$ 174.60
$ 168.00
$ 166.30
$ Am
ortization of senior debt related items and other
19.10$
19.90$
3.20$
2.80$
2.50$
Deferred taxes, net2.40
$ 3.20
$ (29.80)
$ (44.70)
$ (28.50)
$ Gain on sale of equity m
ethod investment
-$
10.30$
-$
-$
(35.30)$
Loss on sale of small product line
(23.40)$
(32.70)$
-$
-$
6.80$
Net loss (gain) on disposals of property and33.60
$ 32.20
$ equipm
ent2.30
$ 0.90
$ (1.60)
$ (3.00)
$ 0.10
$ Changes in operating assets and liabilities, net ofeffects of businesses and certain assets acquired:Receivables, net
(20.30)$
(19.10)$
(36.70)$
(7.40)$
(20.90)$
Inventories(11.60)
$ (29.10)
$ (7.00)
$ (33.60)
$ (49.30)
$ Other current assets
(5.40)$
2.40$
5.80$
(4.80)$
(0.90)$
Other assets(2.90)
$ (16.30)
$ (10.90)
$ 5.70
$ (0.20)
$ Accounts payable
9.20$
48.50$
16.70$
15.60$
16.80$
Other current liabilities61.50
$ 40.10
$ (5.10)
$ 56.60
$ (21.10)
$ Other liabilities
10.70$
0.70$
(1.70)$
3.60$
(11.20)$
- - - - - - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - Net cash provided by operating activities
469.70$
436.20$
363.30$
432.90$
378.10$
466.51$
497.73$
530.92$
566.21$
603.70$
643.54$
685.84$
730.74$
778.39$
828.94$
882.53$
- - - - - - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - Cash flow
s from investing activities:
Capital expenditures for property and equipment
(124.30)$
(102.70)$
(96.90)$
(167.90)$
(210.80)$
Purchases of available-for-sale securities(203.30)
$ (403.00)
$ (339.80)
$ (273.60)
$ (388.30)
$ Sales of available-for-sale securities
136.10$
416.10$
349.80$
283.70$
377.50$
Businesses acquired in purchase transactions, net ofcash and cash equivalents acquired
3.40$
5.00$
(0.20)$
(53.30)$
(32.90)$
Acquisitions of intangible assets-
$ -
$ (43.30)
$ Proceeds from
sale of equity method investm
ent-
$ -
$ 36.00
$ Proceeds from
sales of property and equipment
3.30$
15.60$
1.90$
Other investing activities(2.50)
$ (6.40)
$ (5.10)
$ (7.00)
$ (14.20)
$ - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
Net cash used in investing activities(190.60)
$ (91.00)
$ (88.90)
$ (202.50)
$ (274.10)
$ (296.03)
$ (319.71)
$ (345.29)
$ (372.91)
$ (402.74)
$ (434.96)
$ (469.76)
$ (507.34)
$ (547.93)
$ (591.76)
$ (639.10)
$ - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
Cash flows from
financing activities:Proceeds from
long-term debt
1,582.00$
20.40$
0.10$
25.80$
1.40$
Payments of long-term
debt(276.70)
$ (237.80)
$ (4.10)
$ (275.40)
$ (5.80)
$ Paym
ent of senior debt issuance costs(19.50)
$ -
$ (1.80)
$ -
$ (0.20)
$ Net proceeds from
(payments of) short-term
borrowings
0.70$
1.60$
1.30$
(2.20)$
15.80$
Repurchases of comm
on stock(116.40)
$ (52.40)
$ (6.80)
$ Dividends paid on com
mon stock
-$
(48.60)$
(64.60)$
(66.10)$
(70.73)$
(75.68)$
(80.97)$
(86.64)$
(92.71)$
(99.20)$
(106.14)$
(113.57)$
(121.52)$
(130.03)$
Proceeds from stock option exercises
2.50$
2.80$
0.70$
- - - - - - - - - - - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - - - - - -
- - - - - Net cash used in financing activities
(108.90)$
(300.30)$
(118.40)$
(350.00)$
(59.50)$
Forecasted Financial Statements
Actual Financial Statements
Sealed Air 149
SEALED AIR CORPORATION AND SUBSIDIARIESCommon Size Statement of Cash Flows
20032004
20052006
20072008
20092010
20112012
20132014
20152016
20172018
Net earnings51%
49%70%
63%93%
81%81%
81%82%
82%82%
83%83%
83%84%
84%Depreciation and amortization
33%37%
48%39%
44%Amortization of senior debt related items and other
4%5%
1%1%
1%Deferred taxes, net
1%1%
-8%-10%
-8%Gain on sale of equity method investment
0%2%
0%0%
-9%Loss on sale of small product line
-5%-7%
0%0%
2%Net loss (gain) on disposals of property and
7%7%
0%0%
0%Changes in operating assets and liabilities, net of
0%0%
0%-1%
0%Receivables, net
-4%-4%
-10%-2%
-6%Inventories
-2%-7%
-2%-8%
-13%Other current assets
-1%1%
2%-1%
0%Other assets
-1%-4%
-3%1%
0%Accounts payable
2%11%
5%4%
4%Other current liabilities
13%9%
-1%13%
-6%Other liabilities
2%0%
0%1%
-3%Net cash provided by operating activities
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
Capital expenditures for property and equipment65%
113%109%
83%77%
Purchases of available-for-sale securities107%
443%382%
135%142%
Sales of available-for-sale securities-71%
-457%-393%
-140%-138%
Businesses acquired in purchase transactions, net of-2%
-5%0%
26%12%
Acquisitions of intangible assetsNA
NANA
NA16%
Proceeds from sale of equity method investmentNA
NANA
NA-13%
Proceeds from sales of property and equipmentNA
NA-4%
-8%-1%
Other investing activities1%
7%6%
3%5%
Net cash used in investing activities100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%Proceeds from long-term debt
-1453%-7%
0%-7%
-2%Payments of long-term debt
254%79%
3%79%
10%Payment of senior debt issuance costs
18%NA
2%NA
0%Net proceeds from (payments of) short-term
-1%-1%
-1%1%
-27%Repurchases of common stock
NANA
98%15%
11%Dividends paid on common stock
NANA
NA14%
109%N/A
N/AN/A
N/AN/A
N/AN/A
N/AN/A
N/AN/A
Proceeds from stock option exercisesNA
NA-2%
-1%-1%
Net cash used in financing activities100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%
Actual Financial StatementsForecasted Financial Statements
Sealed Air 150
Restated Statement of Cash Flows:
In relation to SEE’s restated financials, forecasting the statement of cash flows
revised presented the same problems as the stated statement. Our operating cash flow
section started with net earnings. Net earnings on the restated cash flow statement had
decreased in relation to the previously stated earnings. The declines lead us to take a
more conservative approach in our growth for operating activities. The most stable
trend we found when forecasting net earnings was our CFFO/IO. This allowed us to
reach a 7% rate. We applied the same rate of increase to our net cash flow from
operating activities because the net earnings were the only stable and predictable
element to forecast out.
The next step in forecasting the revised statement of cash flows is to analyze the
net cash flow from investing activities. We used an 8% growth rate for our net CFFI
because it was a reasonable estimate among industry average. The lack of stability in
investment ratios eliminated any trend detectable to us, and therefore we analyzed
close competitors such as Pactiv and Bemis to find a suitable growth rate. After we
forecasted our CFFI, we focused on our net cash flow from financing activities on our
restated statement of cash flows. The same inconsistency issue that was presented in
the stated cash flow statement was prevalent in the revised statement as well. Thus,
we were unable to forecast this cash flow due to inability to find relevant information
attaining to this forecast. For example, we even considered and average or industry
average of close competitors. However, growth rates were too unstable and did not
seem accurate enough to forecast for other investors to base assumptions off of. This
led us to the decision of not forecasting this segment. Just as in the stated statement
of cash flows, the only portion of CFFF that was able to be forecasted was dividends.
Forecasted dividends for the revised statements were the same as the stated. Future
dividends are projected to grow at 17.5% of future net earnings.
Sealed Air 151
In conclusion, forecasting the stated statement of cash flows and the revised
statement of cash flows both presented similar problems. However, we feel that the
forecasted values are considered to be the most accurate for the net cash flows of
operating activities since a trend in growth was the most detectable for this segment.
Ratio analysis and industry analysis helped us define our estimates in our forecasting
for the cash flow statements.
Sealed Air 152
SEALED AIR CORPORATION AND SUBSIDIARIESRestated Statem
ent of Cash Flows(in m
illions)2003
20042005
20062007
20082009
20102011
20122013
20142015
20162017
2018Cash flows from
operating activities:Net earnings
(70.40)$
(8.70)$
62.20$
109.60$
218.80$
377.71$
404.15$
432.44$
462.71$
495.10$
529.76$
566.84$
606.52$
648.98$
694.40$
743.01$
Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation and am
ortization154.10
$ 159.60
$ 174.60
$ 168.00
$ 166.30
$ Am
ortization of senior debt related items and other
19.10$
19.90$
3.20$
2.80$
2.50$
Deferred taxes, net2.40
$ 3.20
$ (29.80)
$ (44.70)
$ (28.50)
$ Gain on sale of equity m
ethod investment
-$
10.30$
-$
-$
(35.30)$
Loss on sale of small product line
(23.40)$
(32.70)$
-$
-$
6.80$
Net loss (gain) on disposals of property and33.60
$ 32.20
$ equipm
ent2.30
$ 0.90
$ (1.60)
$ (3.00)
$ 0.10
$ Changes in operating assets and liabilities, net ofeffects of businesses and certain assets acquired:Receivables, net
(20.30)$
(19.10)$
(36.70)$
(7.40)$
(20.90)$
Inventories(11.60)
$ (29.10)
$ (7.00)
$ (33.60)
$ (49.30)
$ Other current assets
(5.40)$
2.40$
5.80$
(4.80)$
(0.90)$
Other assets(2.90)
$ (16.30)
$ (10.90)
$ 5.70
$ (0.20)
$ Accounts payable
9.20$
48.50$
16.70$
15.60$
16.80$
Other current liabilities61.50
$ 40.10
$ (5.10)
$ 56.60
$ (21.10)
$ Other liabilities
10.70$
0.70$
(1.70)$
3.60$
(11.20)$
Net cash provided by operating activities $ 158.90
$ 211.90 $ 169.70 $ 268.40 $ 243.90 $ 466.51 $ 497.73 $ 530.92 $ 566.21 $ 603.70 $ 643.54 $ 685.84 $ 730.74 $ 778.39 $ 828.94 $ 882.53 Cash flows from
investing activities:Capital expenditures for property and equipm
ent(124.30)
$ (102.70)
$ (96.90)
$ (167.90)
$ (210.80)
$ Purchases of available-for-sale securities
(203.30)$
(403.00)$
(339.80)$
(273.60)$
(388.30)$
Sales of available-for-sale securities136.10
$ 416.10
$ 349.80
$ 283.70
$ 377.50
$ Businesses acquired in purchase transactions, net ofcash and cash equivalents acquired
3.40$
5.00$
(0.20)$
(53.30)$
(32.90)$
Acquisitions of intangible assets-
$ -
$ (43.30)
$ Proceeds from
sale of equity method investm
ent-
$ -
$ 36.00
$ Proceeds from
sales of property and equipment
3.30$
15.60$
1.90$
Other investing activities(2.50)
$ (6.40)
$ (5.10)
$ (7.00)
$ (14.20)
$ Net cash used in investing activities
(190.60)$
(91.00)$
(88.90)$
(202.50)$
(274.10)$
(296.03)$
(319.71)$
(345.29)$
(372.91)$
(402.74)$
(434.96)$
(469.76)$
(507.34)$
(547.93)$
(591.76)$
(639.10)$
Cash flows from financing activities:
Proceeds from long-term
debt1,582.00
$ 20.40
$ 0.10
$ 25.80
$ 1.40
$ Paym
ents of long-term debt
(276.70)$
(237.80)$
(4.10)$
(275.40)$
(5.80)$
Payment of senior debt issuance costs
(19.50)$
-$
(1.80)$
-$
(0.20)$
Net proceeds from (paym
ents of) short-termborrowings
0.70$
1.60$
1.30$
(2.20)$
15.80$
Repurchases of comm
on stock(116.40)
$ (52.40)
$ (6.80)
$ Dividends paid on com
mon stock
-$
(48.60)$
(64.60)$
(66.10)$
(70.73)$
(75.68)$
(80.97)$
(86.64)$
(92.71)$
(99.20)$
(106.14)$
(113.57)$
(121.52)$
(130.03)$
Proceeds from stock option exercises
2.50$
2.80$
0.70$
Net cash used in financing activities(108.90)
$ (300.30)
$ (118.40)
$ (350.00)
$ (59.50)
$
Forecasted Financial Statements
Actual Financial Statements
Sealed Air 153
SEALED AIR CORPORATION AND SUBSIDIARIESRestated Common Size Statement of Cash Flows
20032004
20052006
20072008
20092010
20112012
20132014
20152016
20172018
Net earnings-44%
-4%37%
41%90%
81%81%
81%82%
82%82%
83%83%
83%84%
84%Depreciation and amortization
97%75%
103%63%
68%Amortization of senior debt related items and other
12%9%
2%1%
1%Deferred taxes, net
2%2%
-18%-17%
-12%Gain on sale of equity method investment
0%5%
0%0%
-14%Loss on sale of small product line
-15%-15%
0%0%
3%Net loss (gain) on disposals of property and
1%0%
-1%-1%
0%Changes in operating assets and liabilities, net ofReceivables, net
-13%-9%
-22%-3%
-9%Inventories
-7%-14%
-4%-13%
-20%Other current assets
-3%1%
3%-2%
0%Other assets
-2%-8%
-6%2%
0%Accounts payable
6%23%
10%6%
7%Other current liabilities
39%19%
-3%21%
-9%Other liabilities
7%0%
-1%1%
-5%Net cash provided by operating activities
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
Capital expenditures for property and equipment65%
113%109%
83%77%
Purchases of available-for-sale securities107%
443%382%
135%142%
Sales of available-for-sale securities-71%
-457%-393%
-140%-138%
Businesses acquired in purchase transactions, net of-2%
-5%0%
26%12%
Acquisitions of intangible assets0%
0%0%
0%16%
Proceeds from sale of equity method investment0%
0%0%
0%-13%
Proceeds from sales of property and equipment0%
0%-4%
-8%-1%
Other investing activities1%
7%6%
3%5%
Net cash used in investing activities100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%Proceeds from long-term debt
-1453%-7%
0%-7%
-2%Payments of long-term debt
254%79%
3%79%
10%Payment of senior debt issuance costs
18%0%
2%0%
0%Net proceeds from (payments of) short-term
-1%-1%
-1%1%
-27%Repurchases of common stock
0%0%
98%15%
11%Dividends paid on common stock
0%0%
0%14%
109%N/A
N/AN/A
N/AN/A
N/AN/A
N/AN/A
N/AN/A
Proceeds from stock option exercises0%
0%-2%
-1%-1%
Net cash used in financing activities100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%
Actual Financial StatementsForecasted Financial Statements
Sealed Air 154
Forecasting conclusion:
After forecasting the income statement, balance sheet, and statement of cash
flows analyst are able see where a firm is headed in terms of profitability, asset values,
and capital fluctuations. In references to Sealed Air’s forecast, there is a steady increase
in profits margins and net earnings. Sales growth was the basis for our forecast
valuations. According to our predictions sales will increase at a conservative 8% per
year. However there are concerns that current commodity market trends will continue
causing the cost of goods sold to increase at a rate of 8.5%. It is important for Sealed
Air investors to take this into consideration as most plastic packaging products are
created from petroleum derivatives. As the cost of oil increases as the global market
competition expands sales prices will need to increase to counteract these price hikes.
Although this may cause distress to some investors, Sealed Air’s current strong financial
position in the packaging industry will allow this rise in commodity prices to not be
detrimental in its net earnings. In comparison to other analysis forecast, such as yahoo
finance, our predictions differ slightly but seem to have a most conservative take on all
aspects, i.e. sales, cogs, expenses, and operating cash flows. Overall forecasting is
more of an art than predictive science, but the forecast stated previously of all three
financial statements reflect an accurate picture of what we feel will be congruent with
industry standards.
Valuation Analysis Methods of Comparables
The methods of comparables are ratios used by some analysts to help determine
if a firm is overvalued or undervalued. They measure value based on the relative
comparability to the industry average. The only true benefit of using methods of
comparables is that they are quick and easy to implement. However, they are not
grounded in theory and often produce inconsistent results. The data is simply calculated
with little room for interpretation. These comparables were used to suggest if Sealed Air
Sealed Air 155
was overvalued, undervalued, or fairly valued, based on the share price falling within
20% of the actual published share price. Sealed Air’s published share price on June 1,
2008 was $24.36, thus our 20% margin of safety lies between $19.49 and $29.23.
Price/Earnings Trailing:
Trailing P/E
Net Income
12/31/07 # of shares outstanding
Price 6/1/2008 P/E Computed Price
Sealed Air 353 161.63 $ 28.96 Sealed Air Revised 218.8 161.63 $ 17.95 PTV 245 130.79 $ 23.75 12.68 GEF 156.368 23.90 $ 64.50 9.86 PKG 170.066 103.81 $ 26.04 15.90 BMS 181.554 99.65 $ 26.60 14.60 average 13.26
The price to earnings trailing ratio is a very popular ratio seen on the main
summary of a stock on many financial websites, such as yahoo. Although it is often
used, there is little theory to support this ratio. Trailing P/E uses earnings per share of
pervious years and prices of upcoming years. The pull in different directions of this ratio
makes it less useful in the long run to value a security. A better alternative to this
problem would be to use a forecasted P/E, where both elements of the ratio are
forward looking. The P/E trailing ratio is computed dividing the price per share by the
net earnings per share. The net earnings per share are calculated by dividing net
income from the previous year by the total number of shares outstanding. There are
no serious outliers in the industry, so we are able to use all four competitors to get an
average P/E trailing ratio for the packaging industry of 13.26. We then set Sealed Air’s
P/E trailing to 13.26 and the earning per share to 2.18 (net income/# of shares
Sealed Air 156
outstanding). With these two numbers in the equation, it allows us to compute for the
price per share according to the industry average P/E trailing. The computed price is
$28.96, which infers that our stock is fairly valued. The restatement of our financials
causes Sealed Air’s earning per share to decrease to 1.35. This causes our computed
stock price to drop to $17.95. This shows that when Sealed Air’s financials are
restated, then our company appears overvalued. Now, we will use further comparables
to check the relevance of this ratio.
Price/Earnings Forecast:
Forecasted P/E
Forecasted EPS Price 6/1/2008 P/E Computed Price
Sealed Air 2.34 $ 30.98 Sealed Air Revised 2.34 $ 30.98 PTV 1.87 $ 23.75 12.68 GEF 6.54 $ 64.50 9.86 PKG 1.64 $ 26.04 15.90 BMS 1.82 $ 26.60 14.60 average 13.26
The next comparable used was the forecasted price to earnings ratio. This is
very similar to the previous comparable (P/E trailing), except that we use the forecasted
earnings per share instead of the last years earning per share. The benefit of this ratio
is that is incorporates two concurrent forward looking elements. We calculated the
forecasted earnings per share for Sealed Air by taking the forecasted net income
divided by the total number of shares outstanding. Once we calculated this number,
we multiplied it by the industry’s average forecasted P/E to get a price per share of
$30.98. According to the set stock price of SEE at June 1, 2008 of $24.36 there was a
20% margin of differences in price. With this significant drop in price we can conclude
that Sealed Air is undervalued. The restated version of our forecasted P/E does not
change because we would expect Sealed Air to stop impairing goodwill since it has
Sealed Air 157
reached an acceptable percentage of total asset value. Thus, SEE would return to their
normal percentage of net earnings in the future. This comparable can be more useful
in valuing a company for analysis purposes because it bases price and earnings off of
future forecast.
Price/Book:
P/B Comparables
Company PPS BPS P/B Industry Avg. SEE PPS
Sealed Air 24.36 12.5 1.95 2.66 33.24
Sealed Air (restated) 24.36 3.63 6.71 2.66 9.65
Pactiv 24.57 9.24 2.66
Bemis 26.57 13.46 1.97
Packaging Co. 22.08 7.24 3.05
Greif 64.5 21.83 2.95
The price to book ratio is used to compare a stock's market value to its book
value. It is calculated by dividing the current price per share (PPS) by the current book
value of equity per share (BPS). Additionally, the BPS is calculated by dividing the book
value of equity by the number of shares of common stock outstanding. After
determining the P/B ratios for each firm, we took the industry average, excluding
Sealed Air, and multiplied that average by SEE’s book value of equity per share. This
gave us a price per share of $33.24 for Sealed Air. According to the price to book ratio,
Sealed Air is under-valued in the market because their current share price of $24.36 is
much less than the price we computed from P/B ratio industry average. However, after
restatement SEE’s comparable price plummeted to $9.65. This occurred because of the
drastic decrease in the firm’s book value of equity after restatement.
Sealed Air 158
Price Earnings Growth (P.E.G.):
P.E.G. Comparable
Company P/E Growth P.E.G. Industry Avg.
Sealed Air PPS
Sealed Air .94 14.37Sealed Air Restated .94 8.91Pactiv 12.83 10.5 1.22 Greif 16.86 18.67 0.90 Package Co. of America N/A N/A N/A Bemis 13.41 9.33 0.70 7% Growth assumed for Sealed Air
Another method of comparables is the price earnings growth model (PEG), it
uses our previously calculated earnings per share and our forecasted growth in
earnings. This model helps us assess an appropriate stock price according to the price
per earnings and the future growth of the earnings. Around one is a logical and
consistent PEG value. The packaging industry calculated was very close to one at .94.
This average was found by divided the P/E ratio for each competitor in the industry by
their expected 5 year growth. There were no outliers in the industry, but Package
Corporation of America lacked sufficient information to compute this ratio.
Next, since we have the industry average we can plug it into our PEG model and
get a price per share for Sealed Air. The value that was established was $14.37 per
share. This is a value lower than our current market price and our previously valued
P/E models. This price is approximately 60% of the stated market price. The restated
price per share changes to $8.91 due to the decrease in earnings per share. This
means that in Sealed Air’s as stated and restated financials state that they are
overvalued according to this model.
Sealed Air 159
Price/EBITDA:
Price over EBITDA is calculated by taking the current market capitalization rate
and dividing that by EBITDA, which stands for earnings before interest, taxes,
depreciation, and amortization. The current market capitalization is found by multiplying
the company’s price per share (PPS) and their number of shares outstanding. We found
the PPS, number of shares outstanding, and the analysts’ opinion of EBITDA on Yahoo
Finance for Sealed Air’s competitors. We found the number for Sealed Air in their 10-K.
First we calculated the current market capitalization rate and the P/EBITDA ratio
for all the firms. Next, we took the industry average of the ratio, excluding Sealed Air.
Then we took the industry average and multiplied that with Sealed Air’s PPS; and
divided that number by their number of shares outstanding to bring it back to a final
per share number. This ratio had Sealed Air’s PPS as $21.79, with the market PPS being
$24.36. In conclusion, this ratio suggests that Sealed Air is fairly valued because it lies
within the 20% margin of error.
EV/EBITDA:
Enterprise value over earnings before interest, tax, depreciation, and
amortization is one of the most widely used comparable ratios to value firms. The
benefit to using this ratio instead of a price to earnings ratio is that it ignores the capital
structure of a firm. The value of debt can often obscure an investor’s perception of a
company, but by using the EV/EBITDA comparable investors are looking at the debt
free value of a firm to the earnings before interest on debt.
To calculate EV/EBITDA, the first step is to compute the enterprise value of the
firm. Enterprise value is composed of the market value of equity plus the book value of
liabilities minus cash and investments (short term and long term). The next step is the
compute EBITDA. Earnings before interest, tax, depreciation, and amortization is
computed by taking revenues minus expenses excluding tax, interest, depreciation and
amortization. Once both variables have been computed EV is divided by EBITDA. For
our valuations, we took averages from each of our competitors (PKG, GEF, BMS, and
Sealed Air 160
PTV). Once we were able to compute SEE and competitors EV/EBITDA we were able to
compute an estimated price per share. The estimated price using this model for Sealed
Air was $41.03. Although this value is much higher than our observed share price of
$24.63, it is due to the lack of debt associated with this ratio.
In order to have the most accurate value for our EV/EBITDA ratio, we chose to
computer a restated version that excluded goodwill. In order to have a bench mark for
this, we computed the same ratio for SEE’s competitors as well. Goodwill was
subtracted from the end balance of enterprise value for each company. We used SEE,
GEF, PKG, BMS, and PTV’s 10-K to find the balance of goodwill as stated in 2007 for
each company, to subtract for each enterprise value. When computing these restated
values it was difficult to create a bench mark since some companies such as PKG, and
BMS has low values of goodwill on their books compared to SEE and PTV. The
computed share price for the comparable was substantially lower for the restated
version, giving us a price of $16.69. We believe that the large differences in estimated
share price for these are because SEE has over 30% of asset value consisting of
goodwill on their 2007 balance sheet.
In conclusion EV/EBITDA is an important comparable because it looks at firms in
a debt free perspective. If investors feel that not including debt as part of the value of a
firm then this model, to a degree, will accurately reflect an estimated share price of a
firm. However, in relation to SEE we felt that the large spread between the stated and
restated versions of this comparable left too much room for discretion and was not a
truly accurate picture of share price.
EV/EBITDA
Company EV ($ BIL) EBITDA ($ BIL) EV/EBITDA Industry Average Comparable SEE 2.95 0.50 5.88 41.03
PKG 2.77 0.45 6.17 7.02
GEF 3.55 0.42 8.51
PTV 4.31 0.64 6.76
BMS 3.00 0.45 6.64
Sealed Air 161
EV/EBITDA ‐ GOODWILL
Company EV ($BIL) EBITDA ($BIL) EV/EBITDA Industry Average Comparable SEE 0.98 0.50 1.95 16.69
PKG 2.73 0.45 6.09 5.88
GEF 3.01 0.42 7.22
PTV 3.19 0.64 4.99
BMS 2.35 0.45 5.20
Price to Free Cash Flows:
Another method to estimate the market price per share is the price to free cash
flows ratio. This calculation measures how well a company’s free cash flows can support
its equity value. To calculate this estimate, we first find the market cap for Sealed Air
and its competitors by taking the price per share and multiplying that amount by the
number of shares outstanding. Once we determine the market cap, we divide that
amount by the firm’s respective free cash flows. Free cash flows are calculated by
taking the cash flows from operations and adding/subtracting the cash flows from
investing activities. Once we figured the entire price to free cash flows, we find an
industry average by taking the average of Sealed Air’s competitors. In this valuation, we
had to ignore both Pactiv and Greif since they had negative free cash flows.
Price to Free Cash Flows
Market Cap FCF P/FCF Industry Average P/FCF per share
SEE $ 4,132.80 104 39.74 11.68 $ 7.52 SEE revised $ 3,740.05 ‐30.2 ‐123.84 N/A BMS $ 2,647.70 238.42 11.11 PTV $ 3,213.51 ‐1228 ‐2.62 outlier GEF $ 1,541.55 ‐83.32 ‐18.50 outlier PKG $ 2,292.12 186.96 12.26 *market cap and free cash flows in millions
Sealed Air 162
We found the industry average to be 11.68, which we then multiplied by the
market cap of Sealed Air. After we divided that amount by the number of shares
outstanding, we found a price to free cash flow of $7.52 per share. This number is
obviously far below the quoted price of $24.36, which would imply that the current
market price for Sealed Air is a gross overestimation of the true economic value of the
firm.
Dividends/Price:
D/P Comparables
Company DPS PPS D/P Industry Avg SEE PPS
Sealed Air 0.4 25.57 0.016 0.038 10.46
Pactiv N/A 24.57 N/A
Bemis 0.84 26.57 0.032
Packaging Co. 1.05 22.08 0.048
Greif 2.29 64.5 0.036
The dividend to price ratio is another method of comparables. Since Sealed Air
pays dividends, we are able to compute this ratio. The D/P is calculated by taking a
firm’s dividend per share over the price per share. After we calculated each firm’s D/P,
we took an average of the industry (excluding Pactiv since they did not pay dividends).
The next step was to take Sealed Air’s DPS of 0.4 and divide it by the average that we
computed to give us the suggested share price for the D/P model. Since $10.46 falls
well outside of our 20% error tolerance, we determined from this model that Sealed Air
is overvalued. Our restated figures also gave us the same share price because the
impairment of goodwill did not have any impact on future dividends.
Sealed Air 163
Conclusion:
Due to the unreliable nature of these comparables, it is difficult to determine an
accurate conclusion for Sealed Air. These numbers leave no room for analysts’ opinions
which are a heavily weighted part of the valuation process. Collectively, the ratios
suggested that SEE was both overvalued and undervalued, and sometimes restating the
figures caused the discrepancy. As previously stated, these ratios are not supported by
financial theory and must exclude outliers to capture a realistic look at an industry.
However, we can now focus on the intrinsic models to give us a better indication of
Sealed Air’s true value.
Intrinsic Valuation Models
Unlike the methods of comparables, the intrinsic valuation models include more
theory based assumptions and the results can be more easily interpreted. They include
the dividend discount model, discounted free cash flow model, residual income model,
abnormal earnings growth model, and the long-run residual income model. We can
value Sealed Air by forecasting different components such as future dividends, free cash
flows, and net earnings. Sensitivity analysis will show the changes in our estimated
price per share by tweaking growth rates (both positive and negative), WACC, and cost
of equity. These models should provide us with more accurate information for valuing
Sealed Air.
Discounted Dividend Model:
The discounted dividend model, overall, has the lowest explanatory power out of
all the intrinsic valuation models. This is because it is nearly impossible to value a
company based on their forecasted future dividends. Dividends, which first and
foremost change in a step ladder fashion, are very extremely hard to forecast numerous
years down the line with any reasonable accuracy. Also, most stockholders do not
Sealed Air 164
Ke 0.00 0.02 0.04 0.06 0.088.07% 6.87$ 7.64$ 8.84$ 11.00$ 15.96$ 9.07% 6.47$ 7.18$ 8.00$ 10.28$ 14.87$
10.07% 6.10$ 6.75$ 7.78$ 9.62$ 13.86$ 11.07% 5.75$ 6.36$ 7.31$ 8.81$ 12.94$ 12.07% 5.44$ 6.00$ 6.88$ 8.45$ 12.09$ 13.07% 5.14$ 5.66$ 6.48$ 7.94$ 11.31$ 14.07% 4.87$ 5.35$ 6.11$ 7.47$ 10.59$
Discounted Dividends ModelGrowth Rate
Overvalued < $19.43 Undervalued > $29.23$19.43 < Fairly Vauled > $29.23
purchase a certain stock over another based on the dividends because the payback
period for any dividend is way too long to matter. Another reason this model has low
explanatory power is that we are assuming the profitability of the company will go on
for an indefinite amount of time, where in real life, the company could be bankrupt
within the year.
To calculate the value of Sealed Air’s stock using this model, first we took the
forecasted dividends per share from Sealed Air’s statement of cash flows, which were
found by taking 17.5% of that year’s net earnings. Then we discounted these dividends
back to the present valued, using Ke as the discount rate, and calculated the sum,
which was $2.87. Once we had the present value of year by year dividends per share,
we then calculated the present value of the terminal value perpetuity, which starts in
year 2016. We also discounted this number back to present value. The present value of
the terminal perpetuity for Sealed Air was $2.64. Once we had this, we found the model
price of dividends per share to be 5.51 (PV YAY Dividends + TV Perp.). Next, we found
the time consistent price by taking the future value of the initial share price. Using a Ke
11.07%of and 0% growth rate, we found Sealed Air’s time consistent share price to be
$5.75.
The chart above shows the sensitivity analysis of the discounted dividends
model. By using a Ke 11.07% of and growth rate of 0%, we found that Sealed Air is an
undervalued company. Because of the effect that growth rates have on the terminal
Sealed Air 165
value perpetuity, the dividends are somewhat sensitive to growth rates. However, even
with the low explanatory power of this model, it suggests that Sealed Air is an
undervalued company.
Discounted Free Cash Flows Model:
The discounted free cash flows model is a valuation method used to establish
an intrinsic value for the firm’s equity. However, through sensitivity analysis we can
conclude that this particular model does not provide the most useful or accurate
valuation. The model is based on both the present value of the forecasted cash flows,
and the present value of the continuing perpetuity. We find the present values of the
continuing perpetuity by using the weighted average cost of capital before tax
(WACCBT) as the discount rate. WACCBT is used because net income is already taxed
and included in the cash flow from operations, thus avoiding double taxation. The
present value of forecasted cash flows is simply calculated by subtracting the estimated
cash flow from investing activities (CFFI) from the estimated cash flow of operations
(CFFO). In order to make these cash flows time consistent we next multiply each year-
by-year cash flow by its individual present value factor. The present value factors are
derived by taking 1 divided by one plus the WACC, raised to the number of years out
the free cash flow occurred. This calculation gives us the value of equity over the ten
year period.
When using a WACCBT of 7.1% and a 0% growth rate, we calculated our total
present value of year-by year cash flows to be $2195.62 million. The next step was to
add the present value of the terminal value perpetuity. The perpetuity starts in the year
2018, so we have to discount it back to get the value in December 31, 2007 dollars. In
order to achieve this, we have to multiply the present value of the perpetuity by the
present value factor in 2017. When using a WACCBT of 7.10% and a 0% growth rate,
we found the present value of the terminal value perpetuity to be $3466.98 million.
These two calculations added together represent the total present value of free cash
flows to the firm ($5662.59).
Sealed Air 166
This model also includes the forecasted book value of liabilities. The market
value of equity is found by taking the present value of the firm’s assets and subtracting
the market value of liabilities. We can then take this number and divide it by the total
number of shares outstanding to calculate an estimated price per share. Sealed Air’s
market value of liabilities was $3,418.70, which was subtracted from the total present
value of the firm’s assets, giving us an estimated market value of equity of $2,243.89.
After dividing this number by the shares outstanding, we calculated our share price to
be $13.88. The final step was to take the future value of the share price and formulate
the time consistent price as of June 1, 2008. This generated a time consistent share
price of $14.29.
FCF Growth Model
Growth Rate
WACC(BT) 0 0.02 0.04 0.06 0.08
0.041 45.45 93.81 2076.77
0.051 30.89 54.82 165.81
0.061 21.19 34.95 74.93 1714.27
0.071 14.29 22.94 42.77 134.68
0.081 9.14 14.92 26.34 59.52 1419.59
0.091 5.18 9.21 16.40 32.88 109.27
0.101 2.03 4.94 9.75 19.25 46.87
Overvalued < $19.49 Fairly Valued *20% of Observed Price (white)
Undervalued > $29.23
*Observed Price $24.36
Sealed Air 167
FCF Growth Model (restated)
Growth Rate
WACC(BT) 0 0.02 0.04 0.06 0.08
0.041 45.19 93.29 2065.21
0.051 30.71 54.52 164.89
0.061 21.07 34.76 74.52 1704.73
0.071 14.21 22.81 42.53 133.93
0.081 9.09 14.84 26.2 59.19 1411.7
0.091 5.15 9.16 16.31 32.69 108.66
0.101 2.02 4.91 9.69 19.15 46.61
Overvalued < $19.49 Fairly Valued *20% of Observed Price (white)
Undervalued > $29.23
*Observed Price $24.36
The chart above shows the sensitivity analysis for the discounted free cash flows
model. Our initial estimated share price using a WACCBT of 7.10% and a 0% growth
rate yielded us a price of $14.29, which suggests Sealed Air is overvalued. Our restated
chart, using a restated WACC of 5.86%, gave us very similar prices, and there was not
any fluctuation in the classifications for each combination (undervalued, overvalued,
etc.). The charts portray some of the pitfalls in using this valuation model. The model is
extremely sensitive to changes in growth rates because of the effect it has on the
terminal value perpetuity. Most of the prices are unreasonable and make it difficult to
place any significant emphasis on the results. Also, we see that our price per share is
fairly sensitive to changes in WACCBT. An increase in WACCBT from 4.1% to 10.1%
caused the price to drop from $45.45 to $2.03, respectively. Additionally, a firm’s CFFO
and CFFI are some of the toughest numbers to forecast and are less accurate than the
other intrinsic valuation models. This creates more variability and uncertainty for this
particular model.
Sealed Air 168
Overall, the discounted free cash flows model suggests that Sealed Air is overvalued.
This model is flawed because of the over-sensitivity to growth rates, and the difficulty
of forecasting accurate future cash flows. The model has low explanatory power and
therefore will have a minimal influence on our final valuation process
Residual Income:
When estimating the true economic value of a firm’s equity, the residual income
model is perhaps the best valuation tool available. The main reason this model is more
reliable is the fact that it is less sensitive to changes in the terminal value perpetuity
growth rate; thus focusing more attention to the firm’s book value of equity and the
present value of the company’s annual residual income. The residual income model is
even less sensitive to changes in the cost of equity relative to the discounted dividends
or free cash flows models. This valuation model also has a 50% explanatory power, far
exceeding the other models such as the free cash flows (10 -15%) and the discounted
dividends (5%). Perhaps the only potential flaw within this model is the fact that the
initial book value of equity is an accounting assumption made by the firm’s managers.
The first step in the residual income model is to find the book value of equity in
the base year of 2007, which was found on the most recent 10-K’s balance sheet. Next,
we posted both the forecasted net income and total dividend payout. Then, we simply
added the difference between net income and dividends, to the previous year’s book
value of equity to get the next year’s equity. Then we found the benchmark income
estimate by taking the new equity value and multiplying it by the firm’s cost of equity.
Once this figure is found for all 10 years, we then find the annual residual income by
taking the difference between the forecasted net earnings and the benchmark income.
Once all of these numbers have been calculated, we then put them all in current years’
dollars by multiplying each figure by its corresponding present value factor (1+Ke)time .
We then take the sum of all the years’ residual income and add it to both the base
year’s book value of equity and the terminal value of the perpetuity.
Sealed Air 169
To find the terminal value of the perpetuity, we made an estimate of the ending
year’s (2018) residual income by making the figure 85% of the previous year’s residual
income. Once that was found, we then divided that amount by the difference between
the cost of equity and the growth rate. It is important to note that changes in the
growth rate are negative values. The reason this is done is because in equilibrium
theory, all residual income reverts back to zero over a long enough time period,
meaning that residual income and the growth rate are inversely related.
After the initial value equity is added to the total residual incomes (including the
terminal value of perpetuity), we then get a new market value of equity. Once this
amount is divided by the number of shares outstanding, we now have an estimate for
the price per share according to the residual income model. However, this price is in
December 31, 2007 monetary terms. To get a time consistent price on the day of our
valuation (June 1, 2008), we must multiply the year end model price by (1 + Ke)(5/12).
After the adjustments have been made to the model price, we can then compare the
calculated price to the observed market share price on June 1st, 2008, which was
$24.36. By using a 20% margin of acceptance, any model figure below $19.49 indicated
that the current market price is overvalued. Likewise, any model price that was over
$29.23 predicted that the firm was undervalued. Obviously, any model price that fell in
between the two ranges of $19.49 and $29.23 indicated that the current share price is
accurately priced at fair value. It is also important to point out that the only difference
between the original residual income model and the one after restatement is the fact
that the original book value of equity is $2.0196 billion while the initial book value of
equity after the restatement (impairment of goodwill) is just a mere $586.7 million. All
of the forecasted net earnings and dividends are unaffected by the adjustment to total
assets.
Before Adjustments
Sensitivity Analysis Residual Income Model Growth Rate
Ke 0% -10% -20% -30% -40% -50%
Sealed Air 170
6.00% $ 44.03 $ 33.08 $ 30.56 $ 29.43 $ 28.80 $ 28.39 8.00% $ 29.83 $ 25.74 $ 24.57 $ 24.02 $ 23.70 $ 23.48
10.00% $ 21.64 $ 20.38 $ 19.96 $ 19.75 $ 19.63 $ 19.54 11.07% $ 18.58 $ 18.10 $ 17.94 $ 17.85 $ 17.80 $ 17.76 12.00% $ 16.41 $ 16.39 $ 16.38 $ 16.37 $ 16.37 $ 16.36 14.00% $ 12.86 $ 13.35 $ 13.56 $ 13.67 $ 13.74 $ 13.78 Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23
Observed Price $24.36
After Restatement
Sensitivity Analysis Residual Income Model Growth Rate
Ke 0% -10% -20% -30% -40% -50% 6% $ 43.27 $ 29.63 $ 26.48 $ 25.08 $ 24.29 $ 23.78 8% $ 29.20 $ 23.10 $ 21.36 $ 20.54 $ 20.06 $ 19.74
10% $ 21.11 $ 18.34 $ 17.41 $ 16.95 $ 16.68 $ 16.49 11.07% $ 18.09 $ 16.31 $ 15.68 $ 15.35 $ 15.15 $ 15.02
12% $ 15.97 $ 14.78 $ 14.34 $ 14.10 $ 13.96 $ 13.86 14% $ 12.48 $ 12.08 $ 11.91 $ 11.82 $ 11.77 $ 11.73
Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23 Observed Price $24.36
By looking at the residual income tables, we can see the year by year present
value of residual income is creating value at a decreasing rate. The reason the residual
income decreases more and more each year is because most companies cannot sustain
consistent abnormal profits. It is also apparent that the readjustment of total assets had
very little effect on this model.
By closely examining the sensitivity analysis, we can see that a majority of the
figures point to the firm being overvalued. Only at an impossible 6% could this firm be
seen as a potentially undervalued investment. Perhaps the most important fact is that
our estimated cost of equity of 11.07% was consistently in the overvalued range; thus
indicating that Sealed Air is not meeting market expectations.
Sealed Air 171
Abnormal Earnings Growth Model (A.E.G.):
AEG Model Ke Growth Rate
0.00% -
5.00% -
10.00%-
20.00%-
30.00%-
40.00% -50.00% 6.00% 52.05 49.27 47.81 46.30 45.52 45.05 44.73 8.00% 29.9 29.55 29.37 29.18 29.08 29.02 28.98
10.00% 17.35 18.1 18.5 18.91 19.12 19.25 19.34 11.07% 13.29 14.35 14.91 15.49 15.78 15.96 16.08 12.00% 10.17 11.44 12.1 12.79 13.14 13.36 13.5 14.00% 5.86 7.34 8.11 8.92 9.33 9.58 9.75 Overvalued P<19.49 Undervalued P>29.23 Fair Value is 20% observed share price
AEG Model Restated Ke Growth Rate
0.00% -
5.00% -
10.00%-
20.00%-
30.00%-
40.00% ‐50.00%
6.00% 52.74 49.96 48.50 46.99 46.21 45.74 45.42
8.00% 29.40 29.05 28.87 28.68 28.58 28.52 28.48
10.00% 17.21 17.97 18.36 18.77 18.99 19.11 19.20
11.07% 13.04 14.12 14.69 15.28 15.58 15.76 15.88
12.00% 10.27 11.54 12.20 12.89 13.24 13.46 13.60
14.00% 6.12 7.60 8.37 9.18 9.59 9.84 10.01
Overvalued P<19.49
Undervalued P>29.23
Fair Value is 20% observed share
price
The abnormal earnings growth model (A.E.G.) model is based off of accounting
numbers. Abnormal earnings are calculated by adding forecasted net earnings to the
dividend reinvestment earnings, which gives us the cumulative dividend net income.
From the cumulative dividend net income number we will subtract out our normal or
Sealed Air 172
benchmark income to give us our A.E.G. for the year. The dividend reinvestment
(DRIP) is calculated by multiplying the dividend by cost of equity. The DRIP is based
on the assumption that a investor will reinvest dividends and get returns equal to that
of the cost of equity (11.07%). The benchmark or normal income is calculated by
taking the previous year’s net income and increasing it by the cost of equity amount.
Next, after we establish our A.E.G., we need to discount back the appropriate
number of years using our cost of equity of 11.07%. Once values have been put into
present value terms then they are added together to get equal total A.E.G. for your
annual calculations. The other section of A.E.G. that must be accounted for is the value
of the A.E.G. perpetuity. We first calculated the value of the perpetuity and then
discounted it back. The present value of the perpetuity added to the sum of our annual
A.E.G. will give us the total adjusted earnings. Adjusted earnings can be divided by the
capitalization rate to give us our market value of equity that was established by this
model. This market value of equity is given in total dollars, so we must then divide by
our number of shares outstanding (161,627,030 shares) to give us a price per share. To
put our numbers in time consistent bases, we must multiply our share price times one
plus our cost of equity to the 5/12 power. As seen in the table above, the majority of
our prices show that our current price is overvalued.
Last, a way to check that we have run our A.E.G. valuation model correct is to
compare it to our residual income model. The A.E.G. for the year by year should be
equal to the change in your residual income from year to year. As you can see from the
table below, Sealed Air’s forecasted change in residual income was equal to the year by
year value of the A.E.G..
A.E.G. vs. Change in Residual Income Annual AEG -8.06 -8.62 -9.22 -9.87 -10.56 -11.30 -12.09 -12.94 -13.84Change in RI -8.06 -8.62 -9.22 -9.87 -10.56 -11.30 -12.09 -12.94 -13.84
Sealed Air 173
Long Run Residual Income Valuation Model:
The long run residual income model differs only slightly from the previous stated
residual income model. The most noticeable difference is the replacement of earnings
over dividends. Earnings have a smoother growth over time compared to stair stepping
dividend payments and thus, a better ability to be predicted in the long run. This model
is used less frequently because of its high level of sensitivity to changes in return on
equity, growth rates, and cost of equity.
To compute the long run residual income valuation model, the following formula
is used.
MVE0= BVE0 + BVE0 [(ROE-ke)/(ke-g)]
To forecast this model appropriately we took an average of our return on equity over
the next ten years (from our forecasting). This average was 13.64%. We used our
computed Ke of 11.07% from our capital asset pricing model for this valuation. The
growth rate that we used was an average 7%. Once our formula was computed, we
found our time consistent share price to be $21.03. Then sensitivity analysis was run on
our price by changing the ROE, growth rates, and cost of equity.
LR RI Model Growth KE 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%
8.07% 36.76 48.21 81.06 1052.57 9.07% 27.73 32.51 41.90 68.86 866.05
10.07% 22.26 24.52 28.25 35.59 56.66 679.53 11.07% 18.59 19.68 21.31 24.00 29.29 44.46 12.07% 15.96 16.44 17.11 18.10 19.75 22.98 13.07% 13.98 14.11 14.29 14.53 14.90 15.49
ROE held constant at 13.64% Overvalued P<19.49 Undervalued P>29.23 Fair Value is 20% observed share price
Sealed Air 174
ROE
KE 0.13 0.14 0.15 0.16 0.17 0.18
7.07% 1044.51 1231.03 1417.55 1604.07 1790.59 1977.11
8.07% 68.33 80.53 92.74 104.94 117.14 129.34
9.07% 35.32 41.63 47.94 54.24 60.55 66.86
10.07% 23.82 28.07 32.32 36.57 40.83 45.08
11.07% 17.96 21.17 24.38 27.59 30.80 34.00
12.07% 14.42 17.00 19.57 22.15 24.72 27.30
Growth Held Constant at 7%
Overvalued P<19.49
Undervalued P>29.23
Fair Value is 20% observed share price
ROE
Growth 12.60% 13.60% 14.60% 15.60% 16.60% 17.60%
5.00% 16.347 18.498 20.649 22.8 24.9512 27.1022
6.00% 16.996 19.572 22.147 24.722 27.2974 29.8726
7.00% 17.965 21.173 24.38 27.588 30.7964 34.0043
8.00% 19.563 23.816 28.069 32.322 36.5749 40.8278
9.00% 22.707 29.014 35.322 41.629 47.9365 54.2439
10.00% 31.726 43.928 56.13 68.332 80.5347 92.7369
Cost of Equity Held Constant at 11.07%
Overvalued P<19.49
Undervalued P>29.23
Fair Value is 20% observed share price
Sealed Air 175
It was necessary to compute this valuation model using our restated financials in
order to have an accurate picture of the impact of changes in both earnings and equity
values. The computation was performed in the same manner as with the stated
financials. The changes made on the restated version of this model included an initial
change to earnings in 2007, but the following earnings were consistent to the stated
forecast. The reason for this small differentiation is because we felt that we were
aggressive enough to lower goodwill to a small enough percentage of assets that
impairment would not further be needed thereafter. Although, this one small change to
earnings did have a large impact on both our beginning and ending book values of
equity through the model. This in turn led to a much larger return on equity average.
The restated average return on equity was 26.5%. Growth and cost of equity for the
restated version of this model stayed constant as there was no need to change them in
references to restated financials. The computed time consistent value for our restated
long run residual income model was $18.17. The differences in these prices seem
reasonable in comparison to both the dollar and percentage amounts. There for, we
feel that the long run residual income model (both stated and restated), gives an
accurate reflection of share price for Sealed Air.
Analyst Recommendation
After extensive research and careful critical analysis, it is our opinion that the
Sealed Air Corporation is an overvalued firm. Our conclusion was derived from a
comprehensive assessment of the firm’s industry characteristics, accounting policies,
and financial analysis. It was from those observations on the company’s industry,
accounting, and financial structure that we were able to forecast out Sealed Air’s
financial statements from the years 2008 to 2017. From those forecasted financial
statements we then implemented intrinsic valuation models to determine a “true”
economic value of the firm. After calculating the intrinsic value and carefully considering
the overall performance of the firm, we believe that the company does not meet its
Sealed Air 176
market expectations and therefore we suggest that shareholders sell their stock in
Sealed Air.
In order to find the true economic value of a firm, we must first understand the
company’s business environment. By looking at the packaging and container industry as
a whole, we see that the main competitors of Sealed Air were Pactiv, Bemis, Greif, and
the Packaging Corporation of America. It is these same competitors that we use as a
benchmark to gauge the level of performance of Sealed Air. By further analysis, we can
tell that the industry has been experiencing modest levels of growth and that it follows
a cost leadership business strategy. Low concentration of competitors, high economies
of scale and scope, simpler product designs, low differentiation of products, and little
excess capacity have all been classified as key success factors for the packaging and
container industry. These identified key factors were significant when we conducted the
accounting, financial, and prospective analysis.
When performing an accounting analysis, we must look at the key accounting
policies of the firm and measure the degree of disclosure. Operating leases, pension
plans, research and development, goodwill and currency exchanges are all key
accounting factors that are critical to look at since most of those figures are made by a
firm’s management. Given that managers of the firm have an incentive to distort
numbers and artificially increase earnings, we must discount any deceptive accounting
assumptions made by management and undo potential red flags that can overinflate
the true economic value of the firm. It was goodwill that proved to be Sealed Air’s
crucial red flag since it had maintained its level of 40% of total assets the past five
years, and had never been impaired during that time. After writing off a considerable
portion of their goodwill, we then went back and restated the original five years of
financial statements and all of the forecasted information as well. Throughout both the
financial analysis and the valuation methods, we can see ratios and margins listed in
both unadjusted and readjusted terms.
After we had a firm understanding of the key success factors and the key
accounting policies, we then focused our attention to the operating performance of the
Sealed Air 177
company. To effectively measure the company’s performance, we computed numbers
and ratios that use key financial statement line items as their inputs. These figures
measure liquidity, profitability, capital structure, and firm growth. Once a number was
given, we then interpreted the results and compared it to the industry averages.
Overall, Sealed Air performed either on par or above industry average in the matters of
profitability and liquidity; however, they managed to lag behind in the management of
their capital structure.
Perhaps the single most important part of the financial statement analysis is the
valuation methods. These valuation models are grounded in solid financial theory and
their assumptions are based off of the results of our industry, accounting, and financial
analysis. By looking at the figures given by the method of comparables, we can see that
this valuation approach gives us somewhat mixed results. Although an overall majority
of our results (7 out of 13) indicates that Sealed Air is overvalued, the other half is
either fair or undervalued; thus making our conclusion relatively fragmented. We must
also keep in mind that the methods of comparables are a very poor choice when
estimating firm value. Once we performed the intrinsic valuations for Sealed Air, we
were able to get a much clearer picture as to the true economic value of the company.
As opposed to the comparables, the intrinsic models all suggested that Sealed Air was
significantly overvalued. For example, we will use the residual income model as our
focal point, since it has the most reliable source and is the least sensitive to changes in
terminal value of perpetuity growth rates. The residual income model gave us a share
price of $18.58, which was just slightly below the 20% margin of error benchmark.
Both the free cash flows and the A.E.G. model were similar to residual income in this
regard. The only exception would be the long-run residual income model, which
originally priced Sealed Air at fair value. However, once we computed the same formula
with the restated financial statements (taking goodwill impairment into account), we
see that this model lists a price that more closely resembles our original residual income
figure. Despite the fact that Sealed Air is a leader in the packaging and container
Sealed Air 178
industry, and possesses the potential for future prosperity, we still believe that the firm
is worth much less than its current market value.
Sealed Air 179
2003 2004 2005 2006 2007Sealed Air (SEE) 1.02 1.01 1.00 1.01 1.01Pactiv (PTV) 1.01 1.03 1.02 1.00 1.02Bemis (BMS) 1.00 1.01 1.02 1.00 1.00Greif (GEF) 1.02 1.01 1.02 1.02 1.01Packaging Corp. of America (PKG) 1.01 1.01 1.00 1.02 1.01
Net Sales/ Cash from Sales
2003 2004 2005 2006 2007Sealed Air (SEE) 5.74 5.73 5.27 6.00 5.89Pactiv (PTV) 9.07 8.65 8.64 9.03 10.20Bemis (BMS) 7.90 7.94 7.97 8.12 8.14Greif (GEF) 6.50 7.18 9.02 7.93 8.84Packaging Corp. of America (PKG) 9.09 8.73 8.23 7.74 7.88
Net Sales / Accounts Receivables
2003 2004 2005 2006 2007Sealed Air (SEE) 9.51 9.09 9.99 8.50 8.00Pactiv (PTV) 7.86 8.33 9.54 9.85 8.82Bemis (BMS) 8.63 7.32 8.25 7.78 7.62Greif (GEF) 11.46 11.54 13.55 12.61 13.05Packaging Corp. of America (PKG) 10.44 10.54 10.39 11.16 11.33
Net Sales / Inventory
Appendices
Sales Manipulation Diagnostics
Sealed Air 180
2003 2004 2005 2006 2007Sealed Air (SEE) 0.83 0.81 0.84 0.89 0.93Sealed Air (SEE) (restated) 0.91 0.95 1.05 1.16 1.25Pactiv (PTV) 0.92 0.91 0.74 1.03 1.18Bemis (BMS) 1.17 1.24 1.40 1.23 1.20Greif (GEF) 1.09 1.22 1.34 1.40 1.52Packaging Corp. of America (PKG) 0.88 0.95 0.96 1.11 1.17
Asset Turnover
2003 2004 2005 2006 2007Sealed Air (SEE) 0.87 0.87 0.70 0.82 0.69Pactiv (PTV) 0.72 10.64 0.89 0.88 0.92Bemis (BMS) 1.30 0.92 0.87 1.04 1.32Greif (GEF) 1.52 2.17 0.98 0.93 1.34Packaging Corp. of America (PKG) 2.53 1.53 2.38 1.09 1.02
CFFO/OI (raw)
2003 2004 2005 2006 2007Sealed Air (SEE) 6.10 0.88 -10.54 4.76 -2.36Pactiv (PTV) -16.00 -0.07 -0.38 0.85 1.33Bemis (BMS) -0.88 -0.73 0.32 4.87 -2.13Greif (GEF) 1.33 3.16 -0.58 0.75 3.66Packaging Corp. of America (PKG) -0.10 -0.68 -0.71 0.03 0.79
CFFO/ OI (change)
2003 2004 2005 2006 2007Sealed Air (SEE) 0.45 0.43 0.39 0.45 0.35Pactiv (PTV) 0.22 0.32 0.23 0.34 0.34Bemis (BMS) 0.19 0.16 0.14 0.17 0.19Greif (GEF) 0.07 0.17 0.13 0.15 0.22Packaging Corp. of America (PKG) 0.18 0.16 0.18 0.20 0.25
CFFO/NOA (raw)
Expense Manipulation Diagnostics
Sealed Air 181
2003 2004 2005 2006 2007Sealed Air (SEE) 4.96 0.99 0.80 1.25 -0.50Pactiv (PTV) -0.31 -0.08 -25.25 -2.21 0.37Bemis (BMS) 0.25 -0.55 0.03 1.13 0.43Greif (GEF) 0.07 0.17 0.13 0.15 0.22Packaging Corp. of America (PKG) -0.13 1.07 -1.11 -0.06 -1.45
CFFO/NOA (change)
2003 2004 2005 2006 2007Sealed Air (SEE) 0.06 0.06 0.03 0.04 0.01Pactiv (PTV) 0.04 0.06 0.08 0.03 0.06Bemis (BMS) 0.06 0.03 0.03 0.05 0.06Greif (GEF) 0.05 0.09 0.03 0.03 0.07Packaging Corp. of America (PKG) 0.15 0.08 0.10 0.06 0.06
Total Accruals / Sales
Sealed Air 182
2003 2004 2005 2006 2007Sealed Air (SEE) 1.14 1.14 1.03 1.16 1.03Bemis (BMS) 1.2 1.2 1.11 1.01 1.11Pactiv (PTV) 1.08 0.48 1.08 0.68 1.1Greif (GEF) 1.1 0.79 0.99 1.02 0.73Packaging Corp. of America (PKG) 1.06 1.28 0.88 1.09 0.9Industry Average 1.12 0.98 1.02 0.99 0.97
Quick Asset Ratio
2003 2004 2005 2006 2007Sealed Air (SEE) 12.6 12.36 25.23 12.34 23.91Bemis (BMS) 6.04 5.68 6.77 6.76 6.06Packaging Corp. of America (PKG) 7.77 5.53 10.99 8.46 13.59Pactiv (PTV) 4.68 4.58 7.57 9.92 9.65Greif (GEF) 7.07 12.59 9.98 8.71 17.22Industry Average 7.63 8.15 12.11 9.24 14.09
Working Capital Turnover
2003 2004 2005 2006 2007Sealed Air (SEE) 5.74 5.73 6.06 6 5.89Bemis (BMS) 7.9 7.94 7.97 8.12 8.14Packaging Corp. of America (PKG) 9.09 8.73 9.35 8.31 8.39Pactiv (PTV) 6.88 9.15 8.64 9.03 11.92Greif (GEF) 6.5 7.18 9.37 8.33 9.55Industry Average 7.22 7.75 8.28 7.96 8.78
A/R Turnover
2003 2004 2005 2006 2007Sealed Air (SEE) 1.24 1.24 1.11 1.25 1.11Bemis (BMS) 2.38 2.33 2.08 1.97 2.13Pactiv (PTV) 2.07 1.54 1.8 1.54 1.73Greif (GEF) 1.87 1.4 1.63 1.61 1.3Packaging Corp. of America (PKG) 1.91 2.02 1.49 1.67 1.3Industry Avg. 1.89 1.71 1.62 1.6 1.51
Current Ratio
Liquidity Ratios
Sealed Air 183
2003 2004 2005 2006 2007Sealed Air (SEE) 6.52 6.3 7.15 6.07 5.76Bemis (BMS) 6.89 5.78 6.65 6.29 6.21Packaging Corp. of America (PKG) 8.65 8.88 8.79 8.9 8.76Pactiv (PTV) 4.05 5.77 7.04 6.85 6.29Greif (GEF) 9.4 9.59 11.37 10.48 11.18Industry Average 7.10 7.26 8.20 7.72 7.64
Inventory Turnover
2003 2004 2005 2006 2007Sealed Air (SEE) 63.59 63.70 60.23 60.83 61.97Bemis (BMS) 46.20 45.97 45.80 44.95 44.84Packaging Corp. of America (PKG) 40.15 41.81 39.04 43.92 43.50Pactiv (PTV) 53.05 39.89 42.25 40.42 30.62Greif (GEF) 56.15 50.84 38.95 43.82 38.22Industry Average 51.83 48.44 45.25 46.79 43.83
Days Supply Inventory
2003 2004 2005 2006 2007Sealed Air (SEE) 53.95 40.98 43.13 41.70 31.68Bemis (BMS) 57.13 51.83 39.97 44.80 39.34Packaging Corp. of America (PKG) 51.83 48.44 45.25 46.79 43.83Pactiv (PTV) 0.00 0.00 0.00 0.00 0.00Greif (GEF) 2003.00 2004.00 2005.00 2006.00 2007.00Industry Average 433.18 429.05 426.67 427.86 424.37
Cash to Cash Cycle (in days)
2003 2004 2005 2006 2007Sealed Air (SEE) 63.59 63.70 60.23 60.83 61.97Bemis (BMS) 46.20 45.97 45.80 44.95 44.84Packaging Corp. of America (PKG) 40.15 41.81 39.04 43.92 43.50Pactiv (PTV) 53.05 39.89 42.25 40.42 30.62Greif (GEF) 56.15 50.84 38.95 43.82 38.22Industry Average 51.83 48.44 45.25 46.79 43.83
Days Sales Outstanding
Sealed Air 184
2003 2004 2005 2006 2007Sealed Air (SEE) 32% 31% 28% 29% 28%Pactiv (PTV) 30% 28% 26% 31% 29%Bemis (BMS) 20% 21% 19% 19% 19%Greif (GEF) 18% 17% 16% 18% 18%Packaging Corp. of America (PKG) 17% 16% 15% 20% 23%Industry Average 23% 22% 21% 23% 23%
Gross Profit Margin
2003 2004 2005 2006 2007Sealed Air (SEE) 16% 16% 16% 16% 16%Pactiv (PTV) 10% 10% 9% 11% 9%Bemis (BMS) 10% 10% 10% 9% 9%Greif (GEF) 12% 10% 9% 10% 9%Packaging Corp. of America (PKG) 7% 7% 7% 7% 7%Industry Average 11% 11% 10% 11% 10%
Operating Expense Ratio
2003 2004 2005 2006 2007Sealed Air (SEE) 15% 13% 12% 12% 12%Pactiv (PTV) 15% 10% 11% 15% 15%Bemis (BMS) 9% 10% 9% 9% 8%Greif (GEF) 3% 5% 8% 9% 9%Packaging Corp. of America (PKG) 6% 7% 5% 10% 13%Industry Average 10% 9% 9% 11% 11%
Operating Profit Margin
2003 2004 2005 2006 2007Sealed Air (SEE) 6.81% 5.68% 6.26% 6.33% 7.59%Pactiv (PTV) 6.21% 4.58% 1.96% 9.39% 7.53%Bemis (BMS) 5.58% 6.35% 4.68% 4.84% 4.98%Greif (GEF) 0.50% 2.16% 4.32% 5.41% 4.71%Packaging Corp. of America (PKG) -0.83% 3.64% 2.64% 5.72% 7.34%Industry Average 3.65% 4.48% 3.97% 6.34% 6.43%
Net Profit Margin
Profitability Ratios
Sealed Air 185
2003 2004 2005 2006 2007Sealed Air (SEE) 82.89% 80.74% 84.14% 88.97% 92.64%Pactiv (PTV) 91.97% 91.26% 73.67% 103.44% 117.95%Bemis (BMS) 116.77% 123.61% 139.70% 122.76% 120.08%Greif (GEF) 108.99% 121.64% 133.70% 139.57% 151.84%Packaging Corp. of America (PKG) 87.54% 95.21% 95.72% 110.83% 116.56%Industry Average 97.63% 102.49% 105.39% 113.11% 119.81%
Asset Turnover
2003 2004 2005 2006 2007Sealed Air (SEE) 5.64% 4.58% 5.27% 5.64% 7.03%Sealed Air (SEE) (restated) -1.82% -0.22% 1.60% 2.94% 5.88%Pactiv (PTV) 5.72% 4.18% 1.44% 9.72% 8.88%Bemis (BMS) 6.52% 7.85% 6.54% 5.95% 5.97%Greif (GEF) 0.54% 2.63% 5.77% 7.55% 7.15%Packaging Corp. of America (PKG) -0.72% 3.46% 2.53% 6.34% 8.56%Industry Average 3.54% 4.54% 4.31% 7.04% 7.52%
Return on Assets
2003 2004 2005 2006 2007Sealed Air (SEE) 29.58% 19.18% 19.18% 19.69% 21.33%Sealed Air (SEE) (restated) -16.55% -3.54% 7.39% 8.79% 14.70%Bemis (BMS) 15.34% 15.80% 12.43% 13.07% 12.33%Pactiv (PTV) 20.40% 14.61% 4.99% 33.41% 28.72%Greif (GEF) 1.67% 8.34% 16.64% 19.44% 18.53%Packaging Corp. of America (PKG) -1.80% 8.62% 6.43% 18.35% 24.58%Industry Average 8.11% 10.50% 11.18% 18.79% 20.03%
Return On Equity
2003 2004 2005 2006 2007Sealed Air (SEE) 0.00% 19.18% 19.18% 0.00% 0.00%Pactiv (PTV) 20.40% 14.61% 4.99% 33.41% 28.72%Bemis (BMS) 15.34% 15.80% 0.00% 0.00% 0.00%Greif (GEF) 0.00% 0.00% 0.00% 0.00% 0.00%Packaging Corp. of America (PKG) 8.11% 0.00% 0.00% 0.00% 0.00%Industry Average 8.77% 9.92% 4.83% 6.68% 5.74%
Sustainable Growth Rate (SGR)
Sealed Air 186
2003 2004 2005 2006 2007Sealed Air (SEE) 0.00% 4.58% 5.27% 0.00% 0.00%Pactiv (PTV) 5.72% 4.18% 1.44% 9.72% 8.88%Bemis (BMS) 6.52% 7.85% 0.00% 0.00% 0.00%Greif (GEF) 0.00% 0.00% 0.00% 0.00% 0.00%Packaging Corp. of America (PKG) -0.72% 0.00% 0.00% 0.00% 0.00%Industry Average 2.30% 3.32% 1.34% 1.94% 1.78%
Internal Growth Rate (IGR)
Sealed Air 187
2003 2004 2005 2006 2007Sealed Air (SEE) 3.1 2.6 2.4 2 1.6Pactiv (PTV) 2.5 2.5 2.4 2.2 2.1Greif (GEF) 2.1 1.88 1.6 1.6 1.2Packaging Corp. of America (PKG) 1.5 1.5 1.9 1.9 1.7Bemis (BMS) 1 0.89 1.2 1 1Industry Average 2.04 1.874 1.9 1.74 1.52
Debt to Equity
2003 2004 2005 2006 2007Sealed Air (SEE) 4 3.2 3.4 3.5 3.9Pactiv (PTV) 5.6 4.1 3.7 5.8 4.9Greif (GEF) 1.23 2.4 4.9 6.8 6.3Packaging Corp. of America (PKG) 4.5 4.7 3.6 7.2 11.5Bemis (BMS) 19.1 18.9 8.2 6.8 6.1Industry Average 6.89 6.66 4.76 6.02 6.54
Time Interest Earned
2003 2004 2005 2006 2007Sealed Air (SEE) 234.8 181.7 94.26 1.79 68Pactiv (PTV) 25.8 73.4 5.65 124 2.8Packaging Corp. of America (PKG) 2.1 1.9 2.22 208 2.5Greif (GEF) N/A N/A N/A N/A N/ABemis (BMS) 88.8 246.8 331.5 89.46 24.9
Debt Service Margin
2003 2004 2005 2006 2007Sealed Air (SEE) 7.73 6.28 7.42 9.02 6.68Sealed Air (SEE) (restated) 7.64 6.21 7.37 8.97 6.64Pactiv (PTV) 5.39 6.31 9.45 16.08 13.25Bemis (BMS) 12.17 9.71 6.28 7.22 10.83Greif (GEF) 3.12 6.89 7.30 22.33 8.44Packaging Corp. of America (PKG) 6.95 4.74 13.70 7.10 14.73
Z-Scores
Capital Structure Ratios
Sealed Air 188
Weight Rate Weighted Rate Rate SourceCurrent liabilities:Short-term borrowings 36.50 0.011 0.110 0.001 Sealed Air 2/29/2008 10-KCurrent portion of long-term debt 303.70 0.089 0.054 0.005 Sealed Air 2/29/2008 10-KAccounts payable 316.30 0.093 0.021 0.002 3-Month AA Nonfinancial Commercial Paper Rate from St. Louis Federal ReserveDeferred tax liabilities 12.10 0.004 0.039 0.000 10 Year Treasury Bill Rate (Risk Free Rate) From St. Louis Federal ReserveAsbestos settlement liability 512.50 0.150 0.055 0.008 Sealed Air 2/29/2008 10-KOther current liabilities 560.50 0.164 0.055 0.009 Sealed Air 2/29/2008 10-KTotal Current 1741.60 0.509 0.021
Long-term debt, less current portion 1531.60 0.448 0.055 0.025 Sealed Air 2/29/2008 10-KNon-current deferred tax liabilities 9.90 0.003 0.039 0.000 10 Year Treasury Bill Rate (Risk Free Rate) From St. Louis Federal ReserveOther liabilities 135.60 0.040 0.055 0.002 Sealed Air 2/29/2008 10-KTotal Long Term 1,677.10 0.491 0.027
Total Liabilities 3418.70 1.000 4.76%
Cost of Debt
*Liability Values Stated In Millions
Vd* 3,418.70$ Ve* 2,019.60$ Total* 5,438.30$ Kd 4.76%Ke 11.07%
Upper Bound 15.05%Lower Bound 7.10%Alternative Ke 16.21%
UB WACC 2.99%LB WACC 8.58%Alternative WACC 5.63%
WACC 7.10%* in millions
Weighted Average Cost of CapitalVd* 3,418.70$ Ve* 586.70$ Total* 4,005.40$ Kd 4.76%Ke 11.07%
Upper Bound 15.05%Lower Bound 7.10%Alternative Ke 16.21%
UB WACC 6.27%LB WACC 5.10%Alternative WACC 6.44%
WACC 5.68%*in millions
Weighted Cost of Capital (Restated)
Weighted Average Cost of Debt
Weighted Average Cost of Capital
Sealed Air 189
Regression StatisticsMultiple R 0.196090681R Square 0.038451555Adjusted R Square ‐0.005255192Standard Error 0.062866712Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.003477018 0.003477018 0.879762448 0.358450742Residual 22 0.086948918 0.003952224Total 23 0.090425935
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000227321 0.01283324 0.017713434 0.98602713 ‐0.02638719 0.026841831 ‐0.02638719 0.026841831X Variable 1 0.436815235 0.465709468 0.937956528 0.358450742 ‐0.529007083 1.402637553 ‐0.529007083 1.402637553
Regression StatisticsMultiple R 0.196082827R Square 0.038448475Adjusted R Square 0.010167548Standard Error 0.058761858Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.004694361 0.004694361 1.359519602 0.251735045Residual 34 0.117400501 0.003452956Total 35 0.122094862
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000274353 0.009798296 0.028000118 0.977825766 ‐0.019638179 0.020186886 ‐0.019638179 0.020186886X Variable 1 0.454443775 0.389751165 1.165984392 0.251735045 ‐0.337625885 1.246513434 ‐0.337625885 1.246513434
Regression StatisticsMultiple R 0.334362409R Square 0.11179822Adjusted R Square 0.092489486Standard Error 0.055674963Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.017947376 0.017947376 5.790033584 0.020191932Residual 46 0.142586269 0.003099702Total 47 0.160533645
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000448628 0.008047832 0.055745181 0.955786233 ‐0.015750817 0.016648072 ‐0.015750817 0.016648072X Variable 1 0.781482571 0.324772131 2.406248862 0.020191932 0.127750188 1.435214954 0.127750188 1.435214954
Weighted Average Cost of Equity
3 Month Rates
Summery Output – 24
Summery Output – 36
Summery Output – 48
Sealed Air 190
Regression StatisticsMultiple R 0.372771375R Square 0.138958498Adjusted R Square 0.124112955Standard Error 0.053463971Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.0267554 0.0267554 9.360283877 0.003354291Residual 58 0.165786978 0.002858396Total 59 0.192542378
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000800474 0.006967964 0.11487915 0.908937698 ‐0.013147421 0.014748369 ‐0.013147421 0.014748369X Variable 1 0.86633919 0.283167529 3.059458102 0.003354291 0.299517801 1.433160578 0.299517801 1.433160578
Regression StatisticsMultiple R 0.326641592R Square 0.106694729Adjusted R Square 0.093933226Standard Error 0.191158742Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.30551282 0.30551282 8.360670544 0.005104036Residual 70 2.557916535 0.036541665Total 71 2.863429355
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.014933485 0.022534993 0.662679838 0.509711783 ‐0.03001114 0.059878111 ‐0.03001114 0.059878111X Variable 1 1.863217889 0.64438154 2.891482413 0.005104036 0.578039449 3.148396329 0.578039449 3.148396329
Summery Output – 60
Summery Output – 72
6 Month Rates
Sealed Air 191
Regression StatisticsMultiple R 0.196617242R Square 0.03865834Adjusted R Square ‐0.005039008Standard Error 0.062859952Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.003495717 0.003495717 0.884683883 0.357135786Residual 22 0.086930219 0.003951374Total 23 0.090425935
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000273951 0.012831464 0.021349934 0.983158971 ‐0.026336877 0.026884778 ‐0.026336877 0.026884778X Variable 1 0.438249435 0.465937116 0.940576357 0.357135786 ‐0.528044997 1.404543868 ‐0.528044997 1.404543868
Regression StatisticsMultiple R 0.196152932R Square 0.038475973Adjusted R Square 0.010195854Standard Error 0.058761017Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.004697719 0.004697719 1.360530813 0.251562184Residual 34 0.117397144 0.003452857Total 35 0.122094862
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.00033606 0.009796665 0.034303543 0.972835702 ‐0.019573159 0.02024528 ‐0.019573159 0.02024528X Variable 1 0.454840364 0.389946303 1.166417941 0.251562184 ‐0.337625865 1.247306593 ‐0.337625865 1.247306593
Regression StatisticsMultiple R 0.334484991R Square 0.11188021Adjusted R Square 0.092573258Standard Error 0.055672393Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.017960538 0.017960538 5.794814724 0.02014338Residual 46 0.142573107 0.003099415Total 47 0.160533645
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000573655 0.008044803 0.071307486 0.943462165 ‐0.015619694 0.016767003 ‐0.015619694 0.016767003X Variable 1 0.78199592 0.324851375 2.407242141 0.02014338 0.128104027 1.435887813 0.128104027 1.435887813
Regression StatisticsMultiple R 0.372947432R Square 0.139089787Adjusted R Square 0.124246508Standard Error 0.053459895Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.026780678 0.026780678 9.370556334 0.003338178Residual 58 0.1657617 0.00285796Total 59 0.192542378
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000924175 0.006961948 0.132746666 0.894853216 ‐0.013011678 0.014860029 ‐0.013011678 0.014860029X Variable 1 0.866746678 0.283145392 3.061136445 0.003338178 0.299969601 1.433523754 0.299969601 1.433523754
Summery Output - 24
Summery Output – 36
Summery Output – 48
Summery Output
– 60
Sealed Air 192
Regression StatisticsMultiple R 0.326872753R Square 0.106845797Adjusted R Square 0.094086451Standard Error 0.191142578Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.305945391 0.305945391 8.373924415 0.005070953Residual 70 2.557483964 0.036535485Total 71 2.863429355
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.015162411 0.022531286 0.672949205 0.503195239 ‐0.029774822 0.060099644 ‐0.029774822 0.060099644X Variable 1 1.864823756 0.644426327 2.893773387 0.005070953 0.57955599 3.150091523 0.57955599 3.150091523
Regression StatisticsMultiple R 0.198629975R Square 0.039453867Adjusted R Square ‐0.004207321Standard Error 0.062833938Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.003567653 0.003567653 0.903637049 0.352135571Residual 22 0.086858283 0.003948104Total 23 0.090425935
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000208204 0.012826745 0.016232058 0.98719557 ‐0.026392837 0.026809246 ‐0.026392837 0.026809246X Variable 1 0.44316491 0.466195794 0.950598259 0.352135571 ‐0.523665987 1.409995806 ‐0.523665987 1.409995806
Summery Output – 72
2 Year Rates
Summery Output – 24
Sealed Air 193
Regression StatisticsMultiple R 0.197692026R Square 0.039082137Adjusted R Square 0.010819847Standard Error 0.058742492Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.004771728 0.004771728 1.38283689 0.247787086Residual 34 0.117323134 0.00345068Total 35 0.122094862
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000302568 0.009794287 0.030892285 0.975536077 ‐0.019601818 0.020206954 ‐0.019601818 0.020206954X Variable 1 0.458884604 0.390227623 1.175940853 0.247787086 ‐0.334153336 1.251922545 ‐0.334153336 1.251922545
Regression StatisticsMultiple R 0.335700747R Square 0.112694991Adjusted R Square 0.093405752Standard Error 0.05564685Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.018091338 0.018091338 5.842376124 0.019667163Residual 46 0.142442307 0.003096572Total 47 0.160533645
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.00063475 0.008039882 0.078950203 0.937414685 ‐0.015548693 0.016818193 ‐0.015548693 0.016818193X Variable 1 0.785449437 0.324955189 2.417100768 0.019667163 0.131348578 1.439550297 0.131348578 1.439550297
Regression StatisticsMultiple R 0.374160309R Square 0.139995937Adjusted R Square 0.125168281Standard Error 0.053431753Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.026955151 0.026955151 9.441541843 0.003229024Residual 58 0.165587227 0.002854952Total 59 0.192542378
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.001076045 0.006951597 0.154791028 0.877523474 ‐0.012839088 0.014991178 ‐0.012839088 0.014991178X Variable 1 0.871480002 0.28361942 3.072709202 0.003229024 0.303754054 1.439205949 0.303754054 1.439205949
Summery Output – 36
Summery Output – 48
Summery Output – 60
Sealed Air 194
Regression StatisticsMultiple R 0.326669135R Square 0.106712724Adjusted R Square 0.093951477Standard Error 0.191156817Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.305564346 0.305564346 8.362249026 0.005100084Residual 70 2.55786501 0.036540929Total 71 2.863429355
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.015600798 0.022530312 0.692435975 0.490954317 ‐0.029334491 0.060536087 ‐0.029334491 0.060536087X Variable 1 1.86303421 0.644257201 2.891755354 0.005100084 0.578103756 3.147964665 0.578103756 3.147964665
Regression StatisticsMultiple R 0.199215084R Square 0.03968665Adjusted R Square ‐0.003963957Standard Error 0.062826324Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.003588702 0.003588702 0.909188954 0.350689762Residual 22 0.086837233 0.003947147Total 23 0.090425935
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.00026589 0.012824646 0.020732761 0.983645728 ‐0.026330798 0.026862579 ‐0.026330798 0.026862579X Variable 1 0.443263737 0.464873862 0.953514003 0.350689762 ‐0.52082564 1.407353114 ‐0.52082564 1.407353114
Summery Output – 72
5 Year Rates
Summery Output – 24
Sealed Air 195
Regression StatisticsMultiple R 0.198226871R Square 0.039293892Adjusted R Square 0.01103783Standard Error 0.05873602Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.004797582 0.004797582 1.390635829 0.246484133Residual 34 0.11729728 0.00344992Total 35 0.122094862
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000345886 0.009792226 0.03532249 0.972029158 ‐0.019554312 0.020246083 ‐0.019554312 0.020246083X Variable 1 0.459093162 0.389308707 1.179252233 0.246484133 ‐0.332077315 1.250263639 ‐0.332077315 1.250263639Regression StatisticsMultiple R 0.335835865R Square 0.112785728Adjusted R Square 0.093498461Standard Error 0.055644004Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.018105904 0.018105904 5.847678123 0.019614829Residual 46 0.142427741 0.003096255Total 47 0.160533645
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000799558 0.008036724 0.099488046 0.921183093 ‐0.015377528 0.016976644 ‐0.015377528 0.016976644X Variable 1 0.784440227 0.3243905 2.418197288 0.019614829 0.131476028 1.437404426 0.131476028 1.437404426
Regression StatisticsMultiple R 0.374110914R Square 0.139958976Adjusted R Square 0.125130683Standard Error 0.053432901Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.026948034 0.026948034 9.438643496 0.003233407Residual 58 0.165594344 0.002855075Total 59 0.192542378
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.001414541 0.006938966 0.203854691 0.839180639 ‐0.012475309 0.01530439 ‐0.012475309 0.01530439X Variable 1 0.872276299 0.283922154 3.072237539 0.003233407 0.303944364 1.440608234 0.303944364 1.440608234
Summery Output – 36
Summery Output – 48
Summery Output – 60
Sealed Air 196
Regression StatisticsMultiple R 0.325716715R Square 0.106091378Adjusted R Square 0.093321255Standard Error 0.191223287Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.303785168 0.303785168 8.307780366 0.005238317Residual 70 2.559644188 0.036566346Total 71 2.863429355
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.016511875 0.022535881 0.732692662 0.466192325 ‐0.028434522 0.061458271 ‐0.028434522 0.061458271X Variable 1 1.856591343 0.644130432 2.882322044 0.005238317 0.571913722 3.141268965 0.571913722 3.141268965
Regression StatisticsMultiple R 0.198896311R Square 0.039559742Adjusted R Square ‐0.004096633Standard Error 0.062830475Observations 24
ANOVAdf SS MS F Significance F
Regression 1 0.003577227 0.003577227 0.906161862 0.351477019Residual 22 0.086848709 0.003947669Total 23 0.090425935
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000374419 0.012825251 0.029193865 0.976973194 ‐0.026223524 0.026972362 ‐0.026223524 0.026972362X Variable 1 0.441185817 0.463466825 0.951925345 0.351477019 ‐0.519985545 1.40235718 ‐0.519985545 1.40235718
Summery Output – 72
10 Year Rates
Summery Output – 24
Sealed Air 197
Regression StatisticsMultiple R 0.198132328R Square 0.03925642Adjusted R Square 0.010999255Standard Error 0.058737165Observations 36
ANOVAdf SS MS F Significance F
Regression 1 0.004793007 0.004793007 1.389255461 0.246714116Residual 34 0.117301855 0.003450055Total 35 0.122094862
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.000435628 0.009790865 0.044493349 0.964771448 ‐0.019461804 0.02033306 ‐0.019461804 0.02033306X Variable 1 0.457699764 0.388319887 1.178666815 0.246714116 ‐0.331461189 1.246860718 ‐0.331461189 1.246860718
Regression StatisticsMultiple R 0.335441868R Square 0.112521247Adjusted R Square 0.09322823Standard Error 0.055652298Observations 48
ANOVAdf SS MS F Significance F
Regression 1 0.018063446 0.018063446 5.832226779 0.019767763Residual 46 0.142470199 0.003097178Total 47 0.160533645
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.001011951 0.008035247 0.125939012 0.900329042 ‐0.015162161 0.017186063 ‐0.015162161 0.017186063X Variable 1 0.782129214 0.323862979 2.415000368 0.019767763 0.130226859 1.43403157 0.130226859 1.43403157
Summery Output – 36
Summery Output – 48
Sealed Air 198
Regression StatisticsMultiple R 0.373423565R Square 0.139445159Adjusted R Square 0.124608006Standard Error 0.05344886Observations 60
ANOVAdf SS MS F Significance F
Regression 1 0.026849102 0.026849102 9.398377446 0.003294944Residual 58 0.165693276 0.002856781Total 59 0.192542378
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.001755676 0.006929999 0.253344367 0.800897975 ‐0.012116224 0.015627576 ‐0.012116224 0.015627576X Variable 1 0.870623918 0.283990722 3.065677323 0.003294944 0.302154728 1.439093107 0.302154728 1.439093107
Regression StatisticsMultiple R 0.324578111R Square 0.10535095Adjusted R Square 0.092570249Standard Error 0.191302466Observations 72
ANOVAdf SS MS F Significance F
Regression 1 0.301665003 0.301665003 8.242971379 0.005407911Residual 70 2.561764352 0.036596634Total 71 2.863429355
Coefficients Standard Error t Stat P‐value Lower 95% Upper 95% Lower 95.0% Upper 95.0%Intercept 0.017355925 0.022547071 0.76976406 0.444029783 ‐0.02761279 0.062324641 ‐0.02761279 0.062324641X Variable 1 1.849397287 0.644151942 2.871057537 0.005407911 0.564676766 3.134117809 0.564676766 3.134117809
Summery Output – 60
Summery Output – 72
Sealed Air 199
ComparablesCompany P/E Growth P.E.G Industry Average Sealed Air PPSSealed Air (SEE) 0.94 14.37Sealed Air (SEE) (restated) 0.94 8.91Pactiv (PTV) 12.83 10.50 1.22Greif (GEF) 16.86 18.67 0.90Packaging Corp. of America (PKG) N/A N/A N/ABemis (BMS) 13.41 9.33 0.70
7% Growth assumed for Sealed Air
P.E.G.
CompanyNet Income
12/31/07# of shares
outstandingPrice
5/1/2008 P/E Industry Average Computed PriceSealed Air (SEE) 353 161.62703 13.26 28.96$ Sealed Air (SEE) (restated) 218.8 161.62703 13.26 17.95$ Pactiv (PTV) 245 130.79 23.75$ 12.68Greif (GEF) 156.368 23.9 64.50$ 9.86Packaging Corp. of America (PKG) 170.066 103.81 26.04$ 15.90Bemis (BMS) 181.554 99.65 26.60$ 14.60
Trailing P/E
Company Forecasted EPS Price 5/1/2008 P/E Industry Average Computed PriceSealed Air (SEE) 2.34 13.26 30.98$ Sealed Air (SEE) (restated) 2.34 13.26 30.98$ Pactiv (PTV) 1.87 23.75$ 12.68Greif (GEF) 6.54 64.50$ 9.86Packaging Corp. of America (PKG) 1.64 26.04$ 15.90Bemis (BMS) 1.82 26.60$ 14.60
Forecasted P/E
ComparablesCompany PPS BPS P/B Industry Avg SEE PPSSealed Air (SEE) 24.36 12.5 1.95 2.66 33.24Sealed Air (SEE) (restated) 24.36 3.63 6.71 2.66 9.65Pactiv (PTV) 24.57 9.24 2.66Bemis (BMS) 26.57 13.46 1.97Packaging Corp. of America (PKG) 22.08 7.24 3.05Greif (GEF) 64.5 21.83 2.95
P/B
Methods of Comparables
Sealed Air 200
Company EV ($ BIL) EBITDA ($ BIL) EV/EBITDA Industry Average ComparableSealed Air (SEE) 2.95 0.502 5.876 41.03Packaging Corp. of America (PKG) 2.77 0.44835 6.17 7.01925Greif (GEF) 3.55 0.41689 8.506Pactiv (PTV) 4.31 0.638 6.761Bemis (BMS) 3 0.45237 6.64
EV/EBITDA
Company EV ($BIL) EBITDA ($BIL) EV/EBITDA Industry Average ComparableSealed Air (SEE) 0.981 0.502 1.95 16.69Packaging Corp. of America (PKG) 2.73 0.44835 6.08899 5.8750975Greif (GEF) 3.01 0.41689 7.22Pactiv (PTV) 3.188 0.638 4.99Bemis (BMS) 2.353 0.45237 5.2014
EV/EBITDA - Minus GOODWILL
(in millions other than PPS) ComparableCompany PPS # of Shares EBITDA P/EBITDA Industry Average Sealed Air PPSSealed Air (SEE) 24.36 161.63 714.80 5.51 4.93 21.79Pactiv (PTV) 24.57 130.79 638.00 5.04Bemis (BMS) 26.57 99.65 452.37 5.85Greif (GEF) 64.50 23.90 416.07 3.71Package Corp. of America (PKG) 22.08 103.81 448.35 5.11
Price/EBITDA
Sealed Air 201
ComparableCompany Market Cap FCF P/FCF Industry Average P/FCF per shareSealed Air (SEE) 4,132.80$ 104.00 39.74 11.68250501 7.517186457Bemis (BMS) 2,647.70$ 238.42 11.11Pactiv (PTV) 3,213.51$ -1228.00 -2.62 outlierGreif (GEF) 1,541.55$ -83.32 -18.50 outlierPackaging Corp. of America (PKG) 2,292.12$ 186.96 12.26*market cap and free cash flows in millions
Price to Free Cash Flows
ComparableCompany DPS PPS D/P Industry Avg SEE PPSSealed Air (SEE) 0.4 24.36 0.016 0.038 10.46Pactiv (PTV) N/A 24.57 N/ABemis (BMS) 0.84 26.57 0.032Packaging Corp. of America (PKG) 1.05 22.08 0.048Greif (GEF) 2.29 64.5 0.036
D/P
Sealed Air 202
Discounted Dividends Approach 0 1 2 3 4 5 6 7 8 9
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016DPS (Dividends Per Share) 0.400 0.409 0.438 0.468 0.501 0.536 0.574 0.614 0.657 0.703PV Factor 0.925 0.856 0.792 0.733 0.678 0.628 0.581 0.537 0.497
PV of annual div. 0.378 0.375 0.371 0.367 0.364 0.360 0.356 0.353 0.349PV YBY div 3.274TV Perp. 12.18012/31/1987 model price 15.454Time Consistent price 15.962 Ke 0.00 0.02 0.04 0.06 0.08Observed Share Price 25.570 8.07% 6.87$ 7.64$ 8.84$ 11.00$ 15.96$ Initial Cost of Equity 0.111 9.07% 6.47$ 7.18$ 8.00$ 10.28$ 14.87$ Perpetuity Growth Rate (g) 0.080 10.07% 6.10$ 6.75$ 7.78$ 9.62$ 13.86$
11.07% 5.75$ 6.36$ 7.31$ 8.81$ 12.94$ 12.07% 5.44$ 6.00$ 6.88$ 8.45$ 12.09$ 13.07% 5.14$ 5.66$ 6.48$ 7.94$ 11.31$ 14.07% 4.87$ 5.35$ 6.11$ 7.47$ 10.59$
Observed Price $24.36
Forecasted
Discounted Dividends ModelGrowth Rate
Overvalued < $19.43 Undervalued > $29.23$19.43 < Fairly Vauled > $29.23
Discounted Dividends Approach
Sealed Air 203
Discounted FCF 0 1 2 3 4 5 6 7 8 9 10
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017CFFO 522.42 564.22 609.35 658.10 710.75 767.61 829.02 895.34 966.97 1044.33CFFI -296.03 -319.71 -345.29 -372.91 -402.74 -434.96 -469.76 -507.34 -547.93 -591.76FCF Firm 226.39 244.51 264.07 285.19 308.01 332.65 359.26 388.00 419.04 452.56
PV Factor 0.93 0.87 0.81 0.76 0.71 0.66 0.62 0.58 0.54 0.50PV FCF each year 211.39 213.16 214.95 216.76 218.58 220.42 222.27 224.14 226.02 227.92Total PV of YBY FCF 2195.62TV of per 3466.98 6884.08MV of assets 5662.59BV Debt & Preferred stock 3,418.70Model Estimated MVE 2,243.89Divide by share 161.63Model share price 13.88WACC(BT) 0.09 WACC(BT) 0 0.02 0.04 0.06 0.08g 0.00 0.041 45.45 93.81 2076.77
0.051 30.89 54.82 165.810.061 21.19 34.95 74.93 1714.27
time consistent 14.29 0.071 14.29 22.94 42.77 134.680.081 9.14 14.92 26.34 59.52 1419.590.091 5.18 9.21 16.40 32.88 109.27
Observed Share Price 23.88 0.101 2.03 4.94 9.75 19.25 46.87Initial WACC 7.10%Perpetuity growth rate (g) 0%
FCF Growth ModelGrowth Rate
Overvalued < $19.43 $19.43 < Fairly Vauled > $29.23 Undervalued > $29.23
Forecasted
Observed Price $24.36
Discounted Free Cash Flows Approach
Actual
Restated
Sealed Air 204
0 1 2 3 4 5 6 7 8 9 10
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017377.71$ 404.15$ 432.44$ 462.71$ 495.10$ 529.76$ 566.84$ 606.52$ 648.98$ 694.40$ -66.10 -70.73 -75.68 -80.97 -86.64 -92.71 -99.20 -106.14 -113.57 -121.52
2,019.60 2,331.21$ 2,664.63$ 3,021.40$ 3,403.13$ 3,811.59$ 4,248.64$ 4,716.29$ 5,216.66$ 5,752.07$ 6,324.95$
223.57 258.07 294.98 334.47 376.73 421.94 470.32 522.09 577.48 636.75154.14$ 146.08$ 137.47$ 128.24$ 118.37$ 107.81$ 96.52$ 84.43$ 71.49$ 57.65$
0.900 0.811 0.730 0.657 0.592 0.533 0.480 0.432 0.389 0.350138.78$ 118.42$ 100.32$ 84.26$ 70.03$ 57.42$ 46.28$ 36.45$ 27.79$ 20.18$
2,019.60699.93$
154.9191 Ke 0% -10% -20% -30% -40% -50%2,874.45 6.00% 44.03$ 33.08$ 30.56$ 29.43$ 28.80$ 28.39$
161.62703 8.00% 29.83$ 25.74$ 24.57$ 24.02$ 23.70$ 23.48$ 17.78 10.00% 21.64$ 20.38$ 19.96$ 19.75$ 19.63$ 19.54$ 18.58 11.07% 18.58$ 18.10$ 17.94$ 17.85$ 17.80$ 17.76$
12.00% 16.41$ 16.39$ 16.38$ 16.37$ 16.37$ 16.36$ 24.36 14.00% 12.86$ 13.35$ 13.56$ 13.67$ 13.74$ 13.78$
11.07%0.00%
Undervalued > $29.23
Residual Income ApproachForecasted
pv factor
Net Income (Millions)Total Dividends (Millions)Book Value Equity (Millions)
Annual Normal Income (Becnhmark)Annual Residual Income
YBY PV RI
Book Value Equity (Millions)Total PV of YBY RI
Terminal Value PerpetuityMVE 12/31/07
Observed Share Price (6/1/2008)Initial Cost of EquityPerpetuity Growth Rate (g)
divde by shares Model Price on 12/31/07time consistent Price
Observed Price $24.36
Residual Income ModelSensitivity AnalysisGrowth Rate
Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23
Discounted FCF Restated 0 1 2 3 4 5 6 7 8 9 10
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017CFFO 522.42 564.22 609.35 658.10 710.75 767.61 829.02 895.34 966.97 1044.33CFFI -296.03 -319.71 -345.29 -372.91 -402.74 -434.96 -469.76 -507.34 -547.93 -591.76FCF Firm 226.39 244.51 264.07 285.19 308.01 332.65 359.26 388.00 419.04 452.56
PV Factor 0.93 0.87 0.81 0.76 0.71 0.66 0.62 0.58 0.54 0.50PV FCF each year 211.39 213.16 214.95 216.76 218.58 220.42 222.27 224.14 226.02 227.92Total PV of YBY FCF 2195.62TV of per 3466.98 6884.08MV of assets 5662.59BV Debt & Preferred stock 3,418.70Model Estimated MVE 2,243.89Divide by share 161.63Model share price 13.88WACC(BT) 0.09 WACC(BT) 0 0.02 0.04 0.06 0.08g 0.00 0.041 45.19 93.29 2065.21
0.051 30.71 54.52 164.890.061 21.07 34.76 74.52 1704.73
time consistent 14.22 0.071 14.21 22.81 42.53 133.930.081 9.09 14.84 26.2 59.19 1411.70.091 5.15 9.16 16.31 32.69 108.66
Observed Share Price 23.88 0.101 2.02 4.91 9.69 19.15 46.61Initial WACC 5.86%Perpetuity growth rate (g) 0%
Forecasted
Overvalued < $19.43 $19.43 < Fairly Vauled > $29.23 Undervalued > $29.23
Growth Rate
Observed Price $24.36
FCF Growth Model (restated)
Residual Income Approach (R.I)
Actual
Sealed Air 205
0 1 2 3 4 5 6 7 8 9 10
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017377.71$ 404.15$ 432.44$ 462.71$ 495.10$ 529.76$ 566.84$ 606.52$ 648.98$ 694.40$ -66.10 -70.73 -75.68 -80.97 -86.64 -92.71 -99.20 -106.14 -113.57 -121.52
586.70 898.31 1,231.73 1,588.50 1,970.23 2,378.69 2,815.74 3,283.39 3,783.76 4,319.17 4,892.05
64.95 99.44 136.35 175.85 218.10 263.32 311.70 363.47 418.86 478.13312.76 304.71 296.09 286.86 277.00 266.44 255.14 243.05 230.11 216.270.9003 0.8106 0.7298 0.6571 0.5916 0.5326 0.4795 0.4317 0.3887 0.3500281.59 247.00 216.09 188.49 163.87 141.91 122.35 104.93 89.45 75.69
586.70
1631.36
581.17 Ke 0% -10% -20% -30% -40% -50%2,799.23 6% 43.27$ 29.63$ 26.48$ 25.08$ 24.29$ 23.78$
161.62703 8% 29.20$ 23.10$ 21.36$ 20.54$ 20.06$ 19.74$ 17.32$ 10% 21.11$ 18.34$ 17.41$ 16.95$ 16.68$ 16.49$ 18.09$ 11.07% 18.09$ 16.31$ 15.68$ 15.35$ 15.15$ 15.02$
12% 15.97$ 14.78$ 14.34$ 14.10$ 13.96$ 13.86$ 24.36 14% 12.48$ 12.08$ 11.91$ 11.82$ 11.77$ 11.73$
11.07%0.00%
Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23Observed Price $24.36
Residual Income Approach (Restated)Forecasted
Growth RateResidual Income ModelSensitivity Analysis
Net Income (Millions)Total Dividends (Millions)Book Value Equity (Millions)
Annual Normal Income (Becnhmark)Annual Residual Income
Observed Share Price (6/1/2008)Initial Cost of Equity (You Derive)Perpetuity Growth Rate (g)
time consistent Price
pv factorYBY PV RI
Book Value Equity (Millions)
Total PV of YBY RI
Terminal Value PerpetuityMVE 12/31/07divde by shares Model Price on 12/31/07
Restated
Abnormal Earnings Growth Approach (A.E.G)
Sealed Air 206
A.E.G. Approach (Restated) 0 1 2 3 4 5 6 7 8 9 10
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Net Income 218.8 377.71 404.15 432.44 462.71 495.10 529.76 566.84 606.52 648.98 694.40Total Dividends (64.60) 66.10 70.73 75.68 80.97 86.64 92.71 99.20 106.14 113.57 121.52Drip Income ‐7.15 7.32 7.83 8.38 8.96 9.59 10.26 10.98 11.75 12.57Cumulative Dividend Income 370.56 411.47 440.27 471.09 504.06 539.35 577.10 617.50 660.73 706.98Normal (Benchmark) Income 243.02 419.52 448.89 480.31 513.93 549.91 588.40 629.59 673.66 720.82Annual AEG 127.54 ‐8.06 ‐8.62 ‐9.22 ‐9.87 ‐10.56 ‐11.30 ‐12.09 ‐12.94 ‐13.84PV factor 0.90 0.81 0.73 0.66 0.59 0.53 0.48 0.43 0.39 0.35PV AEG 114.83 ‐6.53 ‐6.29 ‐6.06 ‐5.84 ‐5.62 ‐5.42 ‐5.22 ‐5.03 ‐4.84Change in RI ‐8.06 ‐8.62 ‐9.22 ‐9.87 ‐10.56 ‐11.30 ‐12.09 ‐12.94 ‐13.84
Core to Perpetuity 218.80Total PV of AEG added to core 63.97AEG TV Perp ‐59.38 ‐137.535
Total Adjusted Earnings Perp 223.39
KeModel MVE (6/1/08) 2018.01 0.00% ‐5.00% ‐10.00% ‐20.00% ‐30.00% ‐40.00% ‐50.00%Divided by shares 161.63 6.00% 52.74 49.96 48.50 46.99 46.21 45.74 45.42Model Price at 6/1/08 12.49 8.00% 29.40 29.05 28.87 28.68 28.58 28.52 28.48time consistent price 13.04 10.00% 17.21 17.97 18.36 18.77 18.99 19.11 19.20
11.07% 13.04 14.12 14.69 15.28 15.58 15.76 15.88Capitalization Rate Ke 11.07% 12.00% 10.27 11.54 12.20 12.89 13.24 13.46 13.60Observed Share Price 24.36 14.00% 6.12 7.60 8.37 9.18 9.59 9.84 10.01initial equity 11.07%Perpetuity Growth Rate (g) 0
Forecasted
AEG Model Restated
Overvalued < $19.49 Undervalued > $29.23$19.43 < Fairly Valued > $29.23
Growth Rate
Observed Price $24.36
A.E.G. Approach 0 1 2 3 4 5 6 7 8 9 10
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Net Income 353 377.71 404.15 432.44 462.71 495.10 529.76 566.84 606.52 648.98 694.40Total Dividends (64.60) 66.10 70.73 75.68 80.97 86.64 92.71 99.20 106.14 113.57 121.52Drip Income ‐7.15 7.32 7.83 8.38 8.96 9.59 10.26 10.98 11.75 12.57Cumulative Dividend Income 370.56 411.47 440.27 471.09 504.06 539.35 577.10 617.50 660.73 706.98Normal (Benchmark) Income 392.08 419.52 448.89 480.31 513.93 549.91 588.40 629.59 673.66 720.82Annual AEEG ‐21.52 ‐8.06 ‐8.62 ‐9.22 ‐9.87 ‐10.56 ‐11.30 ‐12.09 ‐12.94 ‐13.84PV factor 0.90 0.81 0.73 0.66 0.59 0.53 0.48 0.43 0.39 0.35PV AEG ‐19.37 ‐6.53 ‐6.29 ‐6.06 ‐5.84 ‐5.62 ‐5.42 ‐5.22 ‐5.03 ‐4.84Change in RI (8.06)$ (8.62)$ (9.22)$ (9.87)$ (10.56)$ (11.30)$ (12.09)$ (12.94)$ (13.84)$
Core to Perpetuity 353.00Total PV of AEG added to core ‐70.23AEG TV Perp ‐59.38 ‐137.5351544Total Adjusted Earnings Perp 223.39
KeModel MVE (5/1/08 2018.01 0.00% -5.00% -10.00% -20.00% -30.00% -40.00% -50.00%Divided by shares 161.63 6.00% 52.05 49.27 47.81 46.30 45.52 45.05 44.73Model Price at 5/1/2008 12.49 8.00% 29.9 29.55 29.37 29.18 29.08 29.02 28.98time consistent price 13.04 10.00% 17.35 18.1 18.5 18.91 19.12 19.25 19.34
11.07% 13.04 14.12 14.69 15.28 15.58 15.76 15.88Capitalization Rate Ke 11.07% 12.00% 10.17 11.44 12.1 12.79 13.14 13.36 13.5Observed Share Price 24.36 14.00% 5.86 7.34 8.11 8.92 9.33 9.58 9.75initial equity 11.07%Perpetuity Growth Rate (g) 0 Observed Price $24.36
Forecasted
AEG ModelGrowth Rate
Overvalued < $19.49 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23
Actual
Restated
Sealed Air 207
Long Run ROE Residual Income 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Beginning Book Value of Equity 2019.60 2397.31 2801.46 3233.90 3696.61 4191.71 4721.47 5288.31 5894.83 6543.81Earnings 377.71 404.15 432.44 462.71 495.10 529.76 566.84 606.52 648.98 694.40Ending Book Value of Equity 2,019.60 2397.31 2801.46 3233.90 3696.61 4191.71 4721.47 5288.31 5894.83 6543.81 7238.21
Long Run Return on Equity 0.187022183 0.168585 0.1543624 0.1430814 0.1339337 0.1263822 0.12005603 0.11469065 0.1100924 0.1061163Long Run Growth Rate in Equity 0.15755576 0.144264 0.1260758 0.1119603 0.1006873 0.0914768 0.08381009 0.07732913 0.0717786 0.0669714Cost of Equity 0.1107Average ROE 0.176Average Growth 0.1Shares Outstanding 162Observed Share Price 5/01/2008 $24.36Estimated Price per share 08/31/2007
SEE ‐ Equity based on expected normal earnings 2008 Forecasted
Ke 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%8.07% 36.76 48.21 81.06 1052.579.07% 27.73 32.51 41.90 68.86 866.05
10.07% 22.26 24.52 28.25 35.59 56.66 679.5311.07% 18.59 19.68 21.31 24.00 29.29 44.4612.07% 15.96 16.44 17.11 18.10 19.75 22.9813.07% 13.98 14.11 14.29 14.53 14.90 15.49
ROE held constant at 13.64%
LR RI ModelGrowth Rate
Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23Observed Price $24.36
Long Run Residual Income Approach (LR RI)
Actual
Sealed Air 208
Ke 0.13 0.14 0.15 0.16 0.17 0.187.07% 1044.51 1231.03 1417.55 1604.07 1790.59 1977.118.07% 68.33 80.53 92.74 104.94 117.14 129.349.07% 35.32 41.63 47.94 54.24 60.55 66.86
10.07% 23.82 28.07 32.32 36.57 40.83 45.0811.07% 17.96 21.17 24.38 27.59 30.80 34.0012.07% 14.42 17.00 19.57 22.15 24.72 27.30
Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23
ROE
Growth Held Constant at 7%
Observed Price $24.36
Growth 12.60% 13.60% 14.60% 15.60% 16.60% 17.60%5.00% 16.34735755 18.49832565 20.6492938 22.800262 24.95123 27.1021986.00% 16.99646627 19.57168843 22.1469106 24.722133 27.2973549 29.8725777.00% 17.96454733 21.17250221 24.3804571 27.588412 30.7963668 34.0043228.00% 19.56330009 23.81619141 28.0690827 32.321974 36.5748654 40.8277579.00% 22.7067415 29.01416969 35.3215979 41.629026 47.9364543 54.243882
10.00% 31.72577434 43.92799524 56.1302161 68.332437 80.5346579 92.736879Cost of Equity Held Constant at 11.07%
Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23Observed Price $24.36
ROE
SEE - Equity based on expected normal earnings 2008 Long Run ROE Residual Income Restated
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Beginning Book Value of Equity 586.70 964.41 1368.56 1801.00 2263.71 2758.81 3288.57 3855.41 4461.93 5110.91Earnings 377.71 404.15 432.44 462.71 495.10 529.76 566.84 606.52 648.98 694.40Ending Book Value of Equity 586.70 964.41 1368.56 1801.00 2263.71 2758.81 3288.57 3855.41 4461.93 5110.91 5805.31
Long Run Return on Equity 0.643787285 0.41906419 0.315982 0.256919 0.218712 0.19202392 0.172367 0.1573165 0.14545 0.13586719Long Run Growth Rate in Equity 0.15755576 0.14426397 0.1260758 0.11196 0.1006873 0.09147677 0.08381009 0.0773291 0.07178 0.06697144Cost of Equity 0.1107Average ROE 0.295Average Growth 0.1Shares Outstanding 162Observed Share Price 5/01/2008 $24.36Estimated Price per share 08/31/2007
Forecasted
Restated
Sealed Air 209
Ke 5.00% 6.00% 7.00% 8.00% 9.00% 10.00%8.07% 26.66 37.70 69.39 1006.47 N/A N/A9.07% 20.11 25.42 35.87 65.84 952.29 N/A
10.07% 16.14 19.17 24.18 34.04 62.30 898.1011.07% 13.48 15.39 18.24 22.95 32.20 58.7512.07% 11.57 12.86 14.64 17.31 21.71 30.3713.07% 10.14 11.04 12.23 13.90 16.38 20.48
GrowthLR RI Model
Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23Observed Price $24.36
ROE held constant at 13.64%
Ke 0.13 0.14 0.15 0.16 0.17 0.187.07% 948.23 1002.41 1056.60 1110.78 1164.97 1219.158.07% 62.03 65.58 69.12 72.67 76.21 79.769.07% 32.07 33.90 35.73 37.56 39.40 41.23
10.07% 21.62 22.86 24.09 25.33 26.56 27.8011.07% 16.31 17.24 18.17 19.10 20.04 20.9712.07% 13.09 13.84 14.59 15.34 16.08 16.83
ROE
Growth Held Constant at 7%Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23 Undervalued > $29.23
Observed Price $24.36
Growth 12.60% 13.60% 14.60% 15.60% 16.60% 17.60%5.00% 12.18 12.81 13.43 14.06 14.68 15.316.00% 13.84 14.59 15.34 16.08 16.83 17.587.00% 16.31 17.24 18.17 19.10 20.04 20.978.00% 20.39 21.62 22.86 24.09 25.33 26.569.00% 28.40 30.23 32.07 33.90 35.73 37.56
10.00% 51.40 54.94 58.49 62.03 65.58 69.12
Undervalued > $29.23Observed Price $24.36
ROE
Cost of Equity Held Constant at 11.07%Overvalued < $ 19.43 $19.43 < Fairly Valued > $29.23
Sealed Air 210
References
1. Sealed Air Corporation (SEE), 2003-07 10-k
2. Wall Street Journal
3. Yahoo Finance
4. Reuters
5. Wikipedia.com
6. Investopedia.com
7. Business Analysis & Valuations, Palepu & Healy
8. Dr. Mark Moore’s Notes Finance 3321
9. Pactiv 10-K (2003-2007)
10. Bemis 10-K (2003-2007)
11. Greif 10-K (2003-2007)
12. Packaging Corp. of America 10-K (2003-2007)
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