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Goldman Sachs Unwraps Big Opportunity In The Packing Sector

Sealed Air Corporation NYSE:SEE, Graphic Packaging Holding Company NYSE:GPK - Goldman Sachs Unwraps Big Opportunity In The Packing Sector

While initiating initiate coverage of the US Packaging sector with an Attractive view and 12 percent average upside to price targets, Goldman Sachs’ Brian Maguire noted the positives as the group’s mix of defensive end-markets, stable margins, robust cash flows, late-cycle outperformance, and M&A opportunities.

Millennials would likely drive growth in US Food & Beverage, which is a key end market for the US Packaging sector, analyst Brian Maguire said. He added that while flexibles/films, frozen/microwavable, and snacks are the best positioned, glass may be challenged.

Sealed Air: Best Organic Growth

Maguire initiated coverage of Sealed Air Corp SEE 2.49% with a Buy rating and a price target of $59, representing 27 percent upside. The stock was added to the Americas Conviction List.

Sealed Air’s shares declined 11.5 percent after the company reported its 1Q16 earning, versus a 1.8 percent decline in the SPX. The analyst commented that expectations have now been “sufficiently reset lower for near-term Brazil and resin pass-through headwinds.” He added that the near-term headwinds appeared to be clouding several medium-term benefits.

Maguire expressed optimism regarding the company’s prospects given its sector-leading exposure to the beef cycle, innovation, ecommerce, and resin oversupply. He wrote, “We believe these factors will drive sector-leading organic growth at SEE that justifies its valuation premium to the group.”

Graphic Packaging: Unique Integration Strategy

The analyst initiated coverage of Graphic Packaging Holding Company GPK 1.36% with a Buy rating and a price target of $17, representing 29 percent upside. The stock was added to the Americas Conviction List.

Graphic Packaging had achieved sector-leading CROCI, of 19 percent, and EBITDA margin, of 18.5 percent. Despite this, shares were trading at “the second lowest EBITDA multiple in our coverage,” mainly due to the company’s strategy to backward integrate into boxboard production, Maguire mentioned.

While the company uses more than 80 percent of this production internally, there seems to be too much focus on the narrow and shrinking merchant exposure, which is now below 20 percent, the Goldman Sachs report noted. The analyst expects Graphic Packaging to deploy its robust cash flows to continue acquiring downstream converting assets to reduce this exposure further.

Berry Plastics: Leading FCF Yield And CROCI

Maguire initiate coverage of Berry Plastics Group Inc BERY 0.82% with a Buy rating and a price target of $50, representing 32 percent upside.

“We are attracted by BERY’s sector-leading CROCI (19%) and free cash flow yield (11% on FY2016E), which we believe will quickly reduce BERY’s leverage from ~5x today to under 4x in the next 18 months,” the report stated. As leverage concerns are addressed, shares would trend closer to peers. The analyst also expects the company to be a “top beneficiary of resin oversupply through the end of the decade.”

DateFirmActionFromTo
May 2016Goldman SachsInitiates Coverage onBuy
Apr 2016Credit SuisseAssumesOutperform
Feb 2016RBC CapitalInitiates Coverage onOutperform

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