Shares of MeadWestvaco Corporation (MWV) gained 14% on the back of strong fourth-quarter 2014 results and the announcement of its merger with rival RockTenn Company (RKT) that will create the world's second-largest packaging company with a combined value of $16 billion. Share of MeadWestvaco hit a 52-week high on Jan 26 of $53.88 before closing lower at $51.35.
Earnings Highlights
MeadWestvaco reported adjusted earnings from continuing operations of 46 cents per share, which increased 59% year over year and came ahead of the Zacks Consensus Estimate of 44 cents. The top line benefitted from gains across targeted, higher-value packaging and specialty chemicals end markets, while the bottom line grew on the back of strong operational performance, gains in productivity from major efficiency investments and cost reduction actions.
Including one-time items, earnings in the quarter came in at 31 cents per share compared with $1.16 in the year-ago quarter.
Operational Update
Total revenue rose 5% year over year to $1.37 billion, surpassing the Zacks Consensus Estimate of $1.36 billion. Revenues benefitted from gains across targeted packaging and specialty chemicals markets.
Cost of sales increased 4% to $1.1 billion compared with the year-ago quarter. Gross profit grew 10% to $268 million from $244 million in the year-ago quarter and gross margin increased 90 basis points (bps) to 19.5%.
Selling, general and administrative expenses went down 8% year over year to $142 million in the reported quarter. Adjusted operating profit increased 40% year over year to $126 million. Consequently, operating margin expanded 230 bps to 9.2%.
Segmental Performance
Food & Beverage: Revenues in the segment increased 2% year over year to $765 million. Segment profit increased 16% to $71 million from $61 million in the year-ago quarter.
Home, Health & Beauty: Revenues in the segment went up 5% to $191 million from $182 million in the prior-year quarter. Profit for the segment was $14 million, an impressive 250% improvement from the year-ago quarter profit of $4 million.
Industrial: Net sales in the quarter declined 5% to $139 million from $146 million in the prior-year quarter. Segment profit, however, increased 50% year over year to $27 million.
Specialty Chemical: The segment reported revenues of $241 million, up 3% from the year-ago quarter, however profit was flat year over year at $53 million.
Community Development and Land Management: Segment sales were at $45 million compared with $6 million in the prior-year quarter. The segment reported operating profit of $13 million, as against a loss of $4 million in the year-ago quarter.
Fiscal 2014 Performance
MeadWestvaco’s fiscal 2014 adjusted earnings stood at $1.85, which increased 8% from $1.03 in the prior fiscal and beat the Zacks Consensus Estimate of $1.83. Including one-time items, earnings were at $1.53, a 14% decline from $1.78 in fiscal 2013. Revenues increased 4% year over year to $5.63 billion, outpacing the Zacks Consensus Estimate of $5.6 billion.
Financial Position & Other Updates
As of fiscal 2014-end, MeadWestvaco’s cash and cash equivalents were $454 million versus $1.06 billion as of 2013-end. The company recorded cash flow from operating activities of $382 million in fiscal 2014 compared with $437 million in the prior fiscal. Long-term debt was at $1.79 billion as of fiscal 2014-end versus $1.82 billion as of 2013-end.
On Jan 22, 2015, MeadWestvaco announced that it has signed a definitive agreement to sell its European Tobacco Folding Carton business to AR Packing Group AB. The company incurred restructuring charges of approximately $30 million related to asset write-downs for this business in the fourth quarter.
Merger with RockTenn
The company formed from the MeadWestvaco and RockTenn merger will have combined net sales of $15.7 billion and adjusted EBITDA of $2.9 billion. This includes the impact of $300 million in estimated annual synergies to be achieved over three years.
As per the merger conditions, MeadWestvaco shareholders will receive 0.78 shares of the new company for each share held in MeadWestvaco. MeadWestvaco shareholders will hold 50.1% of the new company while RockTenn shareholders will hold the rest. The deal is touted to be the largest one in the paper industry in a decade since Koch Industries Inc. acquired Georgia-Pacific in 2005 for about $12.6 billion.
The transaction is subject to the approval of shareholders of both MeadWestvaco and RockTenn and also to receipt of certain regulatory approvals and other customary closing conditions. The transaction is expected to close in the second quarter of 2015.
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 industry include Sealed Air Corp. (SEE) with a Zacks Rank #1 (Strong Buy) and Bemis Company, Inc. (BMS), holding a Zacks Rank #2 (Buy).
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