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Growth & Income

Estimates have been surging for MeadWestvaco Corporation (MWV - Analyst Report) after the company posted much better than expected first quarter earnings. It is a Zacks #1 Rank (Strong Buy) stock.

Despite fears of rising commodity prices squeezing margins, MeadWestvaco actually experienced significant margin expansion in the quarter due in large part to improved pricing. The company has also been growing rapidly in the emerging markets.

Based on consensus estimates, analysts expect earnings growth of 35% in 2011 and 13% in 2012. The company also pays a dividend that yields 3.0%.

First Quarter Results

MeadWestvaco reported its first quarter 2011 results on April 27. Earnings per share came in at 43 cents, crushing the Zacks Consensus Estimate of 23 cents. It was a whopping 231% increase over the same quarter in 2010.

Sales rose 8% to $1.37 billion in the quarter, driven by improved pricing and product mix. Emerging market sales continued to be the major growth driver with sales up 24%. Emerging markets now account for close to 28% of the company's total sales.

Among the company's various business segments Specialty Chemicals was particularly strong. Sales were up 28% on 13% volume growth, reflecting the overall strength in the chemical industry. Specialty Chemicals accounts for about 12% of total sales.

Sales in the company's largest segment, Packaging Resources (which accounts for 46% of sales), rose 9% despite a 1% volume decline as the company was able to push through higher prices.

MeadWestvaco also saw a remarkable increase in overall gross profit as the gross margin expanded from 18.3% to 23.2% of sales. This led to a 282% increase in operating income.

Outlook

Following strong Q1 results, analysts unanimously raised their estimates for both 2011 and 2012, sending MWV to a Zacks #1 Rank (Strong Buy) stock.

The 2011 Zacks Consensus Estimate rose from $1.88 just 30 days ago to $2.08. This represents 35% growth over 2010 EPS.

The 2012 consensus estimate rose from $2.15 to $2.35 over the same period. This corresponds to 13% EPS growth.

MeadWestvaco has benefited from an improving global economy and has strung together five consecutive positive earnings surprises. This has led to a steady increase in consensus estimates over the last several months:

MVW: MeadWestvaco Corporation

Dividend

MeadWestvaco pays a dividend that yields a solid 3.0%. The company has only raised its dividend twice in the last 15 years, however.

MeadWestvaco's payout ratio of 55% is a bit higher than peers like Greif Inc (GEF) at 37% and Packaging Corp. of America (PKG) at 42%, so don't expect any major dividend increases anytime soon.

Valuation

Shares of MWV trade at 16.2x forward earnings, a premium to the industry average of 14.5x. The stock trades at 1.7x book value, a discount to the peer group multiple of 2.4x.

MeadWestvaco Corporation is one of the major producers of paperboard and paper in the United States. It converts paperboard and paper into a variety of end-products, manufactures a variety of specialty chemicals, produces lumber, sells timber from its timberlands and is engaged in land development.

The company was founded in 1888 and has a market cap of $5.6 billion.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.

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