We maintain our Neutral recommendation on
MeadWestvaco Corporation
(
MWV
). The stock presently retains a Zacks #3 Rank (short-term Hold
recommendation).
MeadWestvaco's first quarter adjusted earnings declined 26.5% to 34
cents per share while revenues increased 4% year over year to $1.42
billion. The company did not provide any guidance for 2012. It is
hopeful about achieving annual sales growth of more than 5% and
earnings growth in the range of 7% to 10% over the next 3 to 5
years. The Zacks Consensus Estimate for the next quarter is pegged
at 39 cents and for the year at $1.47.
MeadWestvaco is becoming more of a packaging company moving
forward. Following the sale of its Envelope business and the
spin-off of the Consumer & Office Products segment, the company
now generates 85% of its revenues from packaging. Packaging is a
large and growing global market, particularly benefitting from the
economic prosperity in emerging markets around the world,
particularly in Brazil, China and India, where the rapidly emerging
middle classes are triggering dramatic increases in consumer
spending.
Furthermore, packaging is critical to the successful marketing of
products. Solutions that enhance freshness, convenience, and
product safety are becoming imperatives while consumers are more
aware. MeadWestvaco is well positioned to capture growth from these
trends with its new products and solutions, particularly Captivate,
Evertain (its replacement for the composite can), and Polytop's
differentiated caps enclosures in the food packaging market. In the
beverage market, the company's new eMerge packaging system is
successfully penetrating the rapidly growing multi-pack market in
emerging markets.
MeadWestvaco is also expanding its presence in the field of
adherence packaging to widen its client base. MeadWestvaco recently
introduced Shellpak Renew, its latest design in the Shellpak
adherence packaging family. Shellpak Renew helps in making
medications easier for patients besides improving their adherence
to medications. The company has also acquired AARDEX Group, the
leader in measuring patients' adherence to medications. With this
acquisition, the company's portfolio expanded to offer a complete
range of packaging, data analysis and service solution that help in
addressing the problem of non-adherence to medications among
patients.
MeadWestvaco has stepped up its capital improvement plans and
updated its facilities more aggressively. Though this will affect
earnings in the short term it should add significantly to the
bottom line longer term. The company intends to invest sharply in
the range of $650 million to $700 million in fiscal 2012. This
would include major profitable growth and productivity investments
along with ongoing maintenance and compliance issues. MeadWestvaco
has invested around $480 million into the Industrial segment to
build a new linerboard machine in Brazil which is nearing
completion. It will also invest around $165 million for the
construction of a biomass boiler at the Covington facility. The
investment in Brazil is expected to boost revenue by 50% and
more than double the operating earnings of the Industrial segment.
We expect MeadWestvaco's free cash flow to improve significantly,
reflecting higher earnings and reduced capital expenditure
following the completion of the above mentioned investment in
Brazil. Once the new linerboard machine in Brazil comes online and
is accretive to earnings, we expect the company to raise its
dividend. The company will also utilize its strong cash flow for
acquisitions and share buybacks.
On the flip side, we remain concerned about MeadWestvaco's overt
dependence on foreign operations to grow sales. In fiscal 2011, the
company derived 34% of total sales from the international business,
with 14% generated from Europe and another 2% from export sales to
Europe. The persistent debt concerns and soft demand in Europe add
to the headwinds.
Second quarter earnings are also estimated to go down from year-ago
levels in the wake of higher raw material costs and unfavorable
foreign currency translations.
Richmond, Virginia-based MeadWestvaco is a global producer of
packaging, coated and specialty papers, consumer and office
products, and specialty chemicals. The company operates in 30
countries and serves customers in more than 100 nations.
MeadWestvaco's new organizational structure consists of five
segments - Food & Beverage; Home, Health & Beauty;
Industrial, Consumer & Office Products; Specialty Chemicals and
Community Development; and Land Management. MeadWestvaco competes
with
International Paper Company
(
IP
) and
Weyerhaeuser Co.
(
WY
).
INTL PAPER (IP): Free Stock Analysis Report
MEADWESTVACO CP (MWV): Free Stock Analysis
Report
WEYERHAEUSER CO (WY): Free Stock Analysis
Report
To read this article on Zacks.com click here.
Zacks Investment
Research