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MeadWestvaco Q1 Earnings Miss but Up Y/Y

Zacks Equity Research

MeadWestvaco Corporation (MWV) reported first-quarter 2014 adjusted earnings from continuing operations of 23 cents per share, which marked an over twofold increase from the year ago quarter’s earnings per share of 9 cents. However, the reported figure missed the Zacks Consensus Estimate of 26 cents.
Including one-time items, earnings in the quarter came in at 18 cents per share, turning around the year-ago quarter loss per share of 1 cent.
Operational Updates
Total revenue rose 1% year over year to $1.32 billion, led by favorable price and mix. However, sales missed the Zacks Consensus Estimate of $1.35 billion.

Cost of sales decreased 3.6% year over year to $1.07 billion. Gross profit improved 26% to $247 million from $196 million in the year-ago quarter and gross margin increased 370 basis points (bps) to 18.7%.
Selling, general and administrative expenses in the reported quarter declined 4.2% year over year to $161 million. Adjusted operating profit increased threefold to $86 million from $28 million in the year-ago quarter. Consequently, operating margin expanded 440 bps to 6.5%.
Segmental Performance
Food & Beverage: Revenues in the segment inched up 0.3% year over year to $763 million. The increase was driven by solid pricing and product mix gains, along with volume growth. Segment profit increased 37.5% to $55 million from $40 million in the year-ago quarter.
Home, Health & Beauty: Revenues in the segment increased 9% to $205 million from $188 million in the prior-year quarter, led by rise in the demand of value home and garden, beauty and skin care, fragrance and medical dispensing solutions. Profit for the segment was $12 million, improving fourfold from the year-ago quarter profit of $3 million.

Industrial: Net sales in the quarter were $128 million as compared with $132 million in the prior-year quarter. Segment profit increased 45% year over year to $16 million, aided by increased product pricing and improved productivity in Brazilian operations.
Specialty Chemical: The segment reported revenues of $232 million, up 2.7% from the year-ago quarter, driven by solid pricing and product mix gains, along with volume growth and positive productivity from improved utilization rates. The segment’s profit increased 4% to $51 million from the year-ago quarter.

Community Development and Land Management: Segment sales declined 60% year over year to $2 million. The segment reported an operating loss of $3 million, narrower than the year-ago quarter loss of $4 million.  
Financial Position & Other Updates
As of Mar 31, 2014, MeadWestvaco’s cash and cash equivalents were $332 million versus $1.06 billion as of Dec 31, 2013. The company recorded cash usage of $208 million from operating activities in the reported quarter as against $87 million in the year-ago quarter.

Long-term debt remained flat at $1.8 billion as of Mar 31, 2014 as compared as of Dec 31, 2013. Debt-to-capitalization ratio was 34.5% as of Mar 31, 2014, up from 31.5% as of Dec 31, 2013.

During the first quarter, the company entered into an accelerated stock repurchase program and bought back shares of $300 million, using proceeds from the recently completed forestland assets sale to Plum Creek Timber Co. Inc. (PCL).

MeadWestvaco paid a regular quarterly dividend of 25 cents per share and a special dividend of $1.00 per share, using proceeds from the forestland assets sale during the quarter.

Though MeadWestvaco did not provide any specific guidance for fiscal 2014, it expects earnings to be higher than fiscal 2013 on the back of consistent volume improvement in paperboard packaging and high value dispensing.

Furthermore, improved productivity and continued positive operating leverage from increased plant utilization rates will boost earnings. However, increased cost of raw materials and weakness in currency remains matters of concern.
Our View

We believe that going forward, MeadWestvaco will be benefit from its new products, growth strategies, expansion in Brazil, acquisitions and sale of nonperforming businesses.

Richmond, VA-based MeadWestvaco is a global packaging company providing innovative solutions to the world’s most renowned brands in the healthcare, beauty and personal care, food, beverage, home and garden, tobacco, and agricultural industries. The company also produces specialty chemicals for automotive, energy and infrastructure industries.
Currently, MeadWestvaco has a Zacks Rank #3 (Hold). Some better-ranked stocks in the containers industry that are performing well and have a good visibility include Berry Plastics Group, Inc. (BERY) and Graphic Packaging Holding Co. (GPK). Both of these carry a Zacks Rank #2 (Buy).

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