Sealed Air Under Pressure

We expect Sealed Air Corporation (SEE) to report first quarter 2008 EPS of $0.40 on April 30, up slightly from $0.39 reported in the prior-year period, amid higher international volume, acquisitions, and lower operating expenses. The company is also implementing price hikes and improving operating efficiencies.

Sealed Air is focusing more on developing technologies and innovative new products for food and protective packaging applications. It has also announced plans to source more materials from and expand manufacturing operations in China.

In the long run, we anticipate the potential for a significantly lower cost structure. Nonetheless, volume growth remains anemic in the U.S. and higher raw material costs, particularly resins are preventing gross margin expansion. We retain our Hold rating on the stock.

We have valued Sealed Air using a P/E multiple. At its current price, Sealed Air is trading at 15.8x our 2008 EPS estimate of $1.77, above the industry median multiple of 15.0x for packaging stocks. Historically, SEE has traded at a premium to the packaging sector due to its generation of higher margins than other Food and Protective Packaging stocks.

However, U.S. packaging volumes remain uninspiring and high raw material costs prevent margin expansion. A significant expansion in the P/E multiple is unlikely until SEE realizes meaningful benefits from its global manufacturing strategy. Our target price of $28.50 per share is predicated on around 16.1x our 2008 EPS estimate.

Lots Riding on One GHDX Drug

Genomic Health Inc. (GHDX) is an oncology-based biotech company focused on the development and commercialization of genomic-based clinical diagnostic tests for cancer that allow physicians and patients to make individualized treatment decisions. The company's lead product is Oncotype DX, which is used for early stage breast cancer patients to predict the likelihood of cancer recurrence.

Sales of Oncotype remain robust and are expected to increase by over 40 per cent in 2008. We are optimistic about the growth of Oncotype. Clinical studies have validated the use of Oncotype for breast cancer patients. In recent months, Oncotype met the criteria set by Blue Cross and Blue Shield Association Technology Evaluation Center for women with breast cancer and its use in breast cancer treatment selection was recommended by the ASCO.

However, we continue to be concerned about the company's weak pipeline. The company relies heavily on Oncotype DX for both short-term and long-term growth. Sales of the test continue to rise sharply and the company expects to cross the $100-million mark in sales in 2008, a year ahead of our expectations.

We would like to gain more visibility on how Genomic Health diversifies its product offerings and how it expands internationally before we become bullish on the shares. Currently, the company sells Oncotype DX in Israel under a testing and services agreement with Teva Pharmaceutical Industries Limited (TEVA) and in Japan under an agreement with SLR, Inc. Recently, the company signed an agreement with Medical Solutions PLC for distributing the product in the U.K.

We believe the company's shares are fairly valued at the current level, and maintain our Hold rating on Genomic Health's shares with a target price of $20. We arrive at our target price $20 per share by using a P/S multiple of 6.8x our 2011 sales figure of $247.3 million, discounted back at 25 per cent for three years.

Journal Comm Needs Catalysts

Journal Communications' (JRN) publishing business (46% of 2007 revenue) is suffering from a secular decline in print advertising, the effects of which are being exacerbated by the softening economy, real estate downturn and flagging US auto industry, which we don't see improving near-term. Circulation at the flagship Milwaukee Journal Sentinel daily continues to decline, as does ad revenue.