SSCC Smurfit-Stone Container Corp. Common Stock

We reiterate our Neutral recommendation on MeadWestvaco Corporation (MWV), a global producer of packaging, coated and specialty papers, consumer and office products, and specialty chemicals.

The company reported its fourth quarter and fiscal 2010 results, delivering an adjusted EPS of $1.54 in fiscal 2010, up 93% on a year over year basis and outperforming the Zacks Consensus Estimate of $1.50. The outperformance was mainly driven by strong profit growth in Packaging and Specialty Chemicals segment.

Net sales as reported by the company increased 5% year over year to $5.69 billion, falling behind the Zacks Consensus Estimate of $6 billion. The profits in the company’s packaging business were up 54% in the quarter and 38% in the fiscal year, indicating strong performance in global end-markets for retail food and liquid packaging including personal care dispensing solutions, home and garden trigger sprayers, and corrugated packaging serving the produce.

MeadWestvaco operates through five segments comprising packaging resource, consumer solutions, consumer and office products, specialty chemicals and community development and land management. Of all the segments, Packaging, Specialty Chemicals and Community Development drove the results of the company in the positive direction; reporting 5%, 25% and 42%, increase in the year-over-year quarterly sales, respectively.

Unlike its peers who generate a majority of their revenue from paper-related products, MeadWestvaco has diversified its interests in packaging, specialty chemicals, office supply distribution and land management. The company now plans to extend its footprint in growth markets, such as beverage, health care, beauty & personal care and home & garden. It plans to accomplish this through acquisitions, product mix improvements and new product introductions.

MeadWestvaco keeps a continuous check on each of its businesses and makes an effort to divest unprofitable businesses whenever needed. This helps the company focus on its other businesses generating attractive returns. Recently the company sold off its envelope business - Envelope Products Group based in Stamford divested to Connecticut based Cenveo Inc.

According to the terms of the divestiture, the company will transfer all the operating locations and current employees working for Envelope Products Group to Cenveo Inc. The monetary and other terms were not disclosed.

In spite of taking all these measures, MeadWestvaco still struggles with the problem of high unemployment levels, tight credit markets, a weak housing market and low consumer confidence. There still lurks the apprehension of a challenging year ahead due to the weak U.S. economy. If the recessionary conditions extend longer, weaker volumes would probably offset the impact of cost reduction and productivity improvements in the company’s earnings.

In addition, the company may have to reconsider some of its investment plans in the near term. The company also faces intense competition in each of its businesses, in both domestic and international markets. The company competes with many large, well-established companies as well as lower cost manufacturers.

Further, while moving into 2011, the company expects higher freight costs and has already been witnessing a surge in oil pricing. This is likely to lead to a negative impact on both input costs and potential demand in a still fragile global economy.

For fiscal 2011 first quarter, MeadWestvaco expects stable to strengthening demand trends in its markets. The company also expects continued gains in productivity. Complemented by MeadWestvaco’s financial strength, the company is in a favorable position to capitalize on the economic recovery.

Moreover, the company has been focusing on improving its business mix and penetrating the fast growing emerging markets. As a result, its sales increased 15% in 2010 in Asia and Brazil. The emerging markets contributed 27% of the company’s total sales in 2010. Thus, given these headwinds we maintain our Neutral recommendation on MeadWestvaco.

MeadWestvaco Corporation provides solutions to the companies operating in the healthcare, beauty and personal care, food, beverage, home and garden, tobacco, and commercial print industries. The company competes with the likes of International Paper Co. (IP), Smurfit-Stone Container Corp. (SSCC) and Weyerhaeuser Co. (WY).

 
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