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On Apr 19, we maintained our Neutral recommendation on global packaging company, MeadWestvaco Corporation (MWV - Analyst Report), based on expected benefits from its new products, acquired businesses, profitable growth strategies and expansion in Brazil; offset by concerns regarding lower first quarter earnings due to higher start-up expenses for the expansion in Brazil and lower earnings from land sales as well as the situation in Europe.

Why Reiterated?

MeadWestvaco reported fourth-quarter 2012 adjusted earnings of 7 cents per share compared with 3 cents per share in the year-ago quarter. Total revenue increased 3% to $1.33 billion. However, both fell short of the respective Zacks Consensus Estimates.

We appreciate MeadWestvaco’s intent of becoming more of a packaging company going forward. Following the sale of its Envelope business and the Consumer & Office Products segment, MeadWestvaco’s generates 85% of its revenues from packaging. Packaging is a large and growing global market, particularly benefiting from the economic prosperity in the emerging markets including Brazil, China and India. 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.

MeadWestvaco has stepped up its capital improvement plans and updating its facilities more aggressively. Over the past two years, the company has been making significant investments in two of its core Packaging businesses - Food & Beverage (Covington boiler project) and Industrial (Rigesa containerboard expansion), which has led to capital expenditures of $655 million in 2011 and $700 million in 2012. The investment in Brazil is expected to boost revenues by 50% and more than double the operating earnings of the Industrial segment. Cost savings and volume expansion from these initiatives will significantly aid margin expansion in both the segments in the next two years.

On the flipside, MeadWestvaco expects modestly lower earnings in the first quarter compared to the prior-year quarter due to a difficult comparison in the Industrial segment, including higher start-up expenses related to the Brazilian expansion as well as lower earnings from land sales in the Community Development and Land Management segment. Furthermore, we remain cautious due to weak demand in Europe.

Other Stocks to Consider

In contrast to MeadWestvaco, better stocks to consider in the same industry are Packaging Corp. of America (PKG - Snapshot Report), which holds a Zacks Rank #1 (Strong Buy) while Berry Plastics Group, Inc. (BERY - Snapshot Report) and Graphic Packaging Holding (GPK - Snapshot Report) both hold a Zacks Rank #2 (Buy).

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