SEE the Forest for the Trees
Yesterday I made a comment that the market was bidding up shares of SEE in sympathy with the rest of the asbestos stocks. I also said that this was erroneous because SEE had already negated its liability and its upside to a government settlement.
The quick comment is part of a long and complicated story with much legalese and possible outcomes. My statement is based on how I think: a weighted summary of probabilities and values. Here is our probability skew:
10% probability of $6-7 of incremental value
40% probability of $0 of incremental value
50% probability of $2-3 of incremental value
Expected value = $1.90
On a $52 dollar stock trading at a 19 P/E whose earnings trend is minimal, this is an insignificant event (a change in P/E is much more important). It is not as if I am negative on the company; I was more commenting on the reaction.
Our analysis is in conflict with that of a major broker's analyst opinion. Here is their conclusion:
"Senator Feingold indicated today that he would support the proposed legislations establishing an asbestos trust fund. If the current bill is similar to previous versions of the trust fund proposal, its passage could result in almost $10 per share of pre-tax upside to SEE shareholders.
The total value of that settlement today would be approximately $1.04 billion on a pre-tax basis or $6/-7 per share after taxes. In addition, SEE has maintained a substantial cash position on its balance sheet as a reserve against a possible settlement of the Grace bankruptcy process. If the legislation is passed, then Sealed Air would presumably be free to deploy this cash reserve to pay down debt or increase its share buyback program."
The problem with this analysis is that it assumes that there is a 100% probability that if legislation is passed SEE will have no obligation to fund the public trust with the cash/value ($850 million) that the company has put aside. This is faulty.
If the asbestos legislation passes in its rumored form, GRA will be able to choose not to fund its own internal trust and contribute instead to the national asbestos trust. What exactly that will mean to the SEE obligation is unknown, since the proposed settlement agreement has never been made public.
However, we do know that (i) the GRA bankruptcy creditors went to a great deal of time and expense to pursue SEE legally, which is what forced SEE to agree to the proposed settlement in the first place, and (ii) even if GRA chooses the national trust and even if that means SEE is technically released from its obligation, GRA still has the same claims against SEE that it had in the first place, and GRA still needs money to fund its obligation to the national asbestos trust. SEE still seems to us to be a very likely deep pocket to fund all or a significant portion of that obligation. Therefore, our probability distribution is predicated on how a likely scenario unfolds over time.
The point is that declaring a 100% probability of a $6-7 value for SEE is reaching a definite conclusion based on a fluid fact pattern, including certain facts that no one (not even SEE and GRA themselves) currently has.
That is faulty analysis.
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