MeadWestvaco Reports Strong 2Q

Zacks

MeadWestvaco Corporation (MWV) has reported second-quarter 2012 adjusted earnings of 46 cents per share compared with 43 cents in the year-ago quarter. The adjusted earnings comfortably surpassed the Zacks Consensus Estimate of 39 cents.

Adjusted earnings in the reported quarter exclude restructuring charges of $4 million (or 2 cents a share). Including restructuring charges, earnings were 44 cents per share in the quarter compared with 40 cents in the year-ago quarter.

Total revenues in the reported quarter increased 3.5% year over year to $1.42 billion, surpassing the Zacks Consensus Estimate of $1.40 billion. The growth reflects higher volumes of high value products in targeted packaging and specialty chemical markets and higher land revenues.

Cost of sales increased 3.4% year over year in the quarter to $1.1 billion. Selling, general and administrative expenses also increased 3.5% year over year to $179 million.

Segmental Performance

The Food & Beverage segment reported total revenues of $808 million in the second quarter, up 0.7% year over year. The growth was driven by improved pricing and product mix and sales volume growth. Operating profit, however, dropped 5% to $100 million in the quarter.

Home, Health & Beauty segment revenues increased 2% to $203 million. Improved volume in healthcare, home, garden packaging, addition of new business in caps and closures, as well as benefits from pricing and product mix were partially offset by European folding carton sales declines in the beauty and personal care packaging segments. Operating profit jumped 37.5% to $11 million in the quarter.

Revenues from the Industrial segment declined 17% year over year to $111 million. Volume growth was more than offset by negative impacts of currency exchange. Operating profit dropped 57% to $14 million in the quarter.

Specialty Chemical segment revenues increased 13.9% to $246 million. The growth was fueled by the continuous success in penetrating higher value markets for pine chemicals and carbon technologies.

Successful penetration in higher value pine chemicals end markets of adhesives, asphalt and oilfield services led to pricing and product mix improvement. However, these positives were partially offset by the negative impact of currency exchange. Operating profit increased 10.7% to $62 million in the quarter.

Community Development and Land Management saw a whopping 86.7% increase in revenues to $56 million in the second quarter. Operating profit soared 350% to $27 million in the quarter.

Financial Position

Cash and cash equivalents decreased to $531 million as of June 30, 2012, from $656 million as of December 31, 2011. Long-term debt amounted to $1,866 million as of June 30, 2012, versus $1,880 million as of December 31, 2011.

Cash flow from continuing operations was approximately $110 million in the first half of 2012, compared with $137 in the first half of 2011. Capital expenditure from continuing operations was approximately $323 million in the first half of 2012 compared with $258 in the first half of 2011.

Outlook

The company has not provided any specific guidance for 2012. It is hopeful about achieving annual sales growth of more than 5% and earnings growth in the range of 7%–10% over the next 3 to 5 years.

Our View

MeadWestvaco is becoming more of a packaging company moving forward. With the sale of its Envelope business and the spin-off of the Consumer & Office Products segment, the company now focuses more on packaging. Packaging is a large and growing global market, particularly benefiting from the economic prosperity in emerging markets around the world, particularly in Brazil, China and India.

MeadWestvaco faces intense competition in each of its businesses, in both domestic and international markets. It has to contend with many large, well-established companies like International Paper (IP) and Weyerhaeuser Co. (WY). This could result in pricing and demand pressures, which will adversely impact the company’s operating results. Moreover, soft global demand, unfavorable foreign currency and lower land sales will pressure revenues moving forward.   

MeadWestvaco retains a short-term Zacks #3 Rank (Hold).  We have a long-term Neutral recommendation on the stock.

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