On Dec 30, Zacks Investment Research downgraded MeadWestvaco Corporation (MWV) to a Zacks Rank #3 (Hold). Going by the Zacks model, companies holding a Zacks Rank #3 are expected to perform in line with the broader markets.
Why the Downgrade?
MeadWestvaco’s third-quarter 2014 adjusted earnings of 63 cents per share improved 70% year over year. The company’s top line benefited 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.
For the fourth quarter, MeadWestvaco expects earnings to improve year over year driven by higher consumer and industrial packaging volume, pricing actions, productivity improvements and continued operating leverage from higher mill and plant utilization rates as well as ongoing cost saving programs. The company is also poised to benefit from the decline in oil prices.
However, rising costs for wood fiber, negative foreign currency exchange, continued weakness in packaged food and liquid packaging, and persistent economic weakness in Brazil and Europe will to an extent offset the positives.
MeadWestvaco nevertheless remains on track to achieve its target of $75 million of savings from cost reduction by the end of 2014. The company continues to expand its presence in the emerging markets. Growth in emerging markets continued to produce favorable results with revenues accounting for 25% of the company’s total sales.
Given that MeadWestvaco derives about 10% of its business from Latin America, mainly Brazil, substantial changes in currency exchange rates or worsening economic conditions could have a negative impact on revenue and earnings.
Earnings estimates for the current quarter have witnessed 2 negative revisions over the past 60 days while only 1 estimate has moved north. The Zacks Consensus Estimate is currently pegged at 45 cents for the fourth quarter, reflecting 54% year-over-year growth.
Key Picks from the Sector
Some better-ranked stocks worth considering in this sector include Sealed Air Corp. (SEE), Bemis Company, Inc. (BMS) and Packaging Corporation of America (PKG). All three stocks hold a Zacks Rank #2 (Buy).
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