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MeadWestvaco Remains at Neutral

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On Jul 12, we maintained our Neutral recommendation on MeadWestvaco Corporation based on expected benefits from cost reduction initiatives, growth strategies, expansion in Brazil, acquired businesses and sale of non-performing businesses. However, lower second quarter earnings due to a planned major maintenance outage and subsequent start-up issues in its Covington, Va., paperboard mill along with the uncertain economic situation in Europe remain the concerns for this global packaging company

Why Reiterated?

MeadWestvaco’s first-quarter 2013 earnings plunged 52% y-o-y to 16 cents per share due to lower sales of beverage packaging, home and garden packaging, and asphalt paving chemicals. The lower sales were in turn a result of colder weather as well as lower consumer spending in Europe.

MeadWestvaco has stepped up its capital improvement plans and is 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). Cost savings and volume expansion from these initiatives will significantly aid margin expansion in both the segments in the next two years. MeadWestvaco also continues to expand its presence in the emerging markets as these markets provide a larger platform for growth where the growing middle class is increasingly demanding higher-quality goods and packaging.

MeadWestvaco is planning to sell its beauty and personal care folding carton in Europe. In Brazil, the company will repurpose its folding carton operation during the second half of 2013 to manufacture high value, differentiated beauty and personal care dispensing products to meet significant market growth opportunities. Both these operations suffered losses in the first quarter and the company is exiting this business to improve its focus on attractive, profitable growth opportunities. This will improve margins in the Home, Health & Beauty segment.

MeadWestvaco has embarked on an enterprise-wide overhead cost reduction plan, which is expected to lead to annual cost savings between $65 and $75 million by the end of 2014. A major portion of the plan will be completed this year and the company expects benefits of $25 to $30 million in 2013.

On the flipside, MeadWestvaco expects its Food and Beverage (F&B) business segment profit to fall 50% in the second quarter due to unexpected costs and lower productivity owing to a planned major maintenance outage and subsequent start-up issues at the Covington, Va., paperboard mill. Furthermore, operational impacts related to the implementation of a new information system at the mill aggravated the decline.

Moreover, food and beverage packaging continues to be impacted by the ongoing global economic climate, particularly in Europe. We remain cautious due to Europe’s persistent debt concerns and uncertain/soft demand.

Other Stocks to Consider

In contrast to MeadWestvaco, stocks in the industry that are currently performing well and have a good visibility include Mobile Mini, Inc. (MINI - Free Report) , with a Zacks Rank #1 (Strong Buy), and Berry Plastics Group, Inc. (BERY - Free Report) and Rock-Tenn Company , both carrying a Zacks Rank # 2 (Buy).

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