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Shares of packaging solutions provider MeadWestvaco Corporation (MWV - Analyst Report) jumped 4.8% to close at $37.38 yesterday following the announcement of a new program that will simplify the structure of its packaging businesses and deliver savings of $100 million to $125 million by 2015. The company also announced that it expects to return $700 million to its shareholders and hinted that fourth quarter earnings are expected to be in line with current estimates.

Features of the Program
   
In an effort to improve its performance, MeadWestvaco intends to implement a leaner organization design across its packaging businesses that will simplify the structure as well as ensure quick decision making. The company plans to focus on business lines and markets within packaging that provide the greatest opportunity for profitable growth.  MeadWestvaco plans to invest capital in the highest return projects to improve its free cash flow.

Projected Savings & Projections

As mentioned above, the program is projected to generate annual pre-tax cost savings of $100 million to $125 million by the end of 2015, of which $75 million is expected to be realized in 2014. This is in addition to MeadWestvaco’s ongoing overhead cost reduction plan targeting $75 million to $80 million of savings by the end of 2014. Thus, total annual cost savings from these two programs are expected to exceed $200 million by the end of 2015.

Free cash flow (cash flow after capital expenditures) is expected to increase by at least $100 million in 2014 on the back of higher expected after-tax earnings and a $50 million reduction in capital expenditures to approximately $350 million.

MeadWestvaco expects that by the end of 2015, EBITDA margins of the Food & Beverage and Home, Health & Beauty packaging segments will improve significantly. Industrial Packaging, after initial start-up costs associated with the expansion of the Tres Barras mill in Brazil, is performing well and is expected to achieve EBITDA margins of at least 25% by the end of 2014.

Enhanced Return to Shareholders

MeadWestvaco plans to return $700 million to its shareholders, above its earlier stated target of $665 million. This includes proceeds from the recently closed forestland assets sale to Plum Creek Timber Co. Inc. (PCL - Analyst Report) in October last year.  In the fourth quarter of 2013, MeadWestvaco repurchased 3.75 million shares for $131 million. Details regarding the company’s plans to return the balance $570 million to its shareholders will be divulged shortly.

Fourth Quarter: A Sneak Peak

MeadWestvaco expects fourth quarter earnings per share to be in line with current analyst consensus expectations. The company is slated to release its fourth quarter and fiscal 2013 results on Jan 29, 2014. The Zacks Consensus Estimate for the quarter is currently pegged at 24 cents, reflecting 249% year-over-year growth and, for fiscal 2013, the consensus estimate is at $1.26, reflecting 1.14% annual growth.
 
MeadWestvaco’s fourth quarter earnings are expected to be higher year over year driven by continued volume improvement across its targeted packaging and specialty chemicals markets, pricing improvement in industrial packaging solutions and productivity gains from increased operating leverage. Furthermore, the ramp up of the new paperboard machine in Brazil and savings from its overhead reduction initiative will boost earnings. However, challenging macroeconomic conditions, higher raw materials costs (particularly resin and fiber) and depreciation of the Real against the U.S. Dollar will act as deterrents.

MeadWestvaco currently holds a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-ranked stocks worth considering in the sector include Packaging Corporation of America (PKG - Snapshot Report) and AptarGroup, Inc. (ATR - Analyst Report). While Packaging Corporation holds a Zacks Rank #1 (Strong Buy), AptarGroup carries a Zacks Rank #2 (Buy).

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