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Not All Businesses Are Enjoying the Global Recovery

By Louie Grint – Jan 8, 2014 at 10:21AM

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The packaging industry is still being held back by weakness in Europe and other factors. What's the outlook for MeadWestvaco, Bemis, and Sealed Air?

The paper packaging industry is still not feeling the effects of a recovering global economy. Some positives, such as a modestly rising demand for corrugated packaging and the recent consolidation within the sector, which should drive more supply discipline, could give some hope. But, the region that is still offsetting overall performance is Europe, and most major companies in the sector have operations in the continent. Let's analyze the outlook for three packaging companies: MeadWestvaco (WRK 0.67%), Bemis (BMS), and Sealed Air (SEE 0.63%).

New venture in real estate
First is a global producer of packaging, coated and specialty papers, and specialty chemicals MeadWestvaco (WRK 0.67%).

The company presented decent results for third quarter. Earnings grew 26% year over year to $0.49 per share, and revenue increased by 3% to $1.43.

Its food & beverage and home, health & beauty businesses, which account for 56% and 14% of MeadWestvaco's sales respectively, continue to show weak performance, particularly in Europe. In fact, the company's decision to exit its beauty and personal care folding carton operations in Europe and Brazil will still affect MeadWestvaco in the near term. Health & beauty declined 5% year over year, showing significant volume declines in home and garden packaging as well as beauty and personal care folding carton packaging divisions.

These segments will remain sluggish for the first half of 2014. Plus, if we add higher raw material costs (mainly resin), and transitory costs related to the exit of its folding carton business, the cocktail is not very easy to swallow.

Meadwestvaco is embarking itself in a new field. In October it announced its intention to sell U.S. forestland and develop real estate in South Carolina though a partnership. This strategic transformation still requires time to show profitability. For now, it is increasing exposure to a new, less explored market.

Weak performance
Second, we have a major supplier of packaging and pressure sensitive materials, Bemis (BMS).

Third-quarter earnings for Bemis remained flat, but net sales declined 2.3% to $1.3 billion compared to the prior-year quarter. The reasons? Weak volume, cautious spending, the depreciation of the Brazilian real, and low performance in Europe, which accounts for about 11% of Bemis' business.

Its only segment that actually grew in the quarter is pressure sensitive materials, and showed a modest 1.2% increase year over year. Unfortunately, this is not much considering that the segment only accounts for 11% of total revenue.

However, Bemis' aggressive cost-reduction program will bring some savings, which, along with some benefits from acquisitions, could offset the weak performance.

Improving, but still exposed
Finally, we have a major specialty packaging service provider, Sealed Air (SEE 0.63%). Its portfolio of brands includes Cryovac, Bubble Wrap, and Diversey.

Third-quarter adjusted net earnings grew 39%, driven by higher volumes and a positive price/mix. Sales increased 2% to $1.9 billion year over year, helped by a growth of 1.4% in volume and 1.5% in price/mix.

Sealed Air's ongoing integration & optimization program and restructuring plan should help save costs looking forward. In fact, it projects up to $110 million in earnings improvement by 2015 compared to 2012. Plus, the incoming cash from the sale of its medical packaging business is expected to be used to reduce debt and thereby lower interest expenses contributing to margins.

However, exposure to Europe, which generates 32% of total sales, is a major concern. Net sales in the region dropped 0.9% on a constant dollar basis; it is hard to foresee significant improvement in the near term.

Bottom line
Europe keeps on giving headaches for this industry. Sales are soft in the region and, although it might stabilize, none of these companies' forecasts show growth there in the near term.

Mid-term, it is hard to foresee MeadWestvaco showing an outstanding performance. Growth should come when the company settles and restructures its business lines.

Bemis is still adjusting from its cost-reduction initiatives and facility consolidation. For now, growing sales figures and increasing volumes are hard to expect.

Despite many improvements and a possible margin expansion throughout 2014, Sealed Air still remains highly exposed to Europe. Overall, its outlook is more promising than the other two companies considered.

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