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On Jan 11, we have maintained our Neutral recommendation on global packaging company MeadWestvaco (MWV - Analyst Report) following decent third-quarter 2012 results and impressive expansion opportunities, partially offset by soft demand and negative foreign currency fluctuations. MeadWestvaco retains a short-term Zacks Rank #3 (Hold).

Why Reiterated?
 
MeadWestvaco reported third-quarter adjusted earnings of 39 cents per share compared with 51 cents in the year-ago quarter, in line with the Zacks Consensus Estimate.  Total revenue remained flat year over year at $1.40 billion, but beat our projection of $1.37 billion.
 
We appreciate MeadWestvaco’s intent of 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.
 
MeadWestvaco is well positioned to capture growth from new products and solutions. Management has reaffirmed its targets of $1 billion in sales growth and 7–10% annual earnings growth over the next 3–5 years.
 
The company continues to expand its presence in emerging markets. MeadWestvaco recently acquired the remaining shares of Resitec Industria Quimica, Ltda in Brazil and Ruby Macons Limited in India. It has stepped up its capital improvement plans and updating its facilities more aggressively. Cost savings and volume expansion from these initiatives will significantly aid margin expansion in both the segments in the next two years.
 
We expect MeadWestvaco’s free cash flow to improve significantly, reflecting higher earnings and reduced capital expenditure following the completion of the above-mentioned investments. We expect the company to raise its dividend by mid-2013 backed by a strong balance sheet and over funded pension and also utilize its cash flow for acquisitions and share buyback.
 
Earnings in the Industrial segment in the fourth quarter are expected to be affected by continued soft demand and order trends, unfavorable foreign exchange translations and start-up expenses related to the commissioning of the new machine in Brazil. Furthermore, exposure to Europe, soft global demand remains concerns.
 
Other stocks to consider
 
In contrast to MeadWestvaco, better stocks to consider in the same industry are Graphic Packaging Holding Company (GPK - Snapshot Report) which holds a Zacks Rank #1 (Strong Buy), AEP Industries Inc. and Packaging Corp. of America (PKG - Snapshot Report) which hold Zacks Rank #2 (Buy).

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