MeadWestvaco Joint Ventures Highlight Q3 Earnings Report

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After reviewing MeadWestvaco’s third-quarter results and the pending land sale with Plum Creek Timber, analysts do not expect to materially change the fair value estimate of $34 per share.

Starting with third-quarter results, solid performance from MWV’s Industrial and Specialty Chemicals divisions again offset persistent weakness in the Food and Beverage and the Home, Health, and Beauty segments–a trend we expect to continue going into 2014. In Industrial, all of the positive momentum this quarter was driven by favorable pricing compared with the prior year as MWV raised prices in Brazil to offset wage and input cost inflation, though MWV lost some volume because of the higher regional pricing.

Specialty Chemicals’ EBIT margin improved 110 basis points to 25.4% on a year-over-year basis and mainly benefited from productivity gains that offset slight top-line headwinds. We expect similarly steady results going into the end of 2013 and into 2014. Operating margins in the F&B and HH&B segments contracted on a year-over-year basis as both units were unable to offset wage and input cost inflation. MWV’s lack of pricing power in these segments is a key driver of our no-moat thesis for the broader company.

MWV also announced on Monday evening that it had agreed to sell 501,000 acres of timberland and some mineral rights to Plum Creek for $934 million ($1,864/acre); Plum Creek will also invest $152 million for a 29% stake in two land development joint ventures with MWV that include the East Edisto master planned community in Charleston, S.C. (109,000 acres).

Total cash consideration for the deal is $1.1 billion with an implied valuation of $1.5 billion including Plum Creek’s equity investment; approximately $665 million will be available to return to shareholders. We thought the price received was fair, but we think better options existed, such as a REIT spin-off of the land.

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