Value Ideas Contest: Don't Miss the Forest for the Trees
An investment in MeadWestvaco (MWV) represents an opportunity to own a leader in the packaging industry with significant non-core land assets that the market is assigning little if any value to. Taking into account the value of the company’s core packaging operations, its land holdings, and its attractive though non-synergistic office and school supplies business, MWV trades at an estimated 42% discount to intrinsic value on a sum-of-the-parts basis.
Packaging (44% of sales, 10% operating margins)
Manufactures bleached paperboard, Coated Natural Kraft paperboard and corrugated packaging.
MWV’s packaging business operates in a consolidated industry with rational pricing, despite offering a commodity product. MWV is the second largest player in most of its business lines, many of which are duopolies. The segment has a wide moat due to its economies of scale and despite being a modest growth business, it has high growth potential in Brazil.
Consumer Solutions (30% of sales, 7% operating margins)
Manufactures multi-pack cartons primarily for the beverage market, high-end packaging for the tobacco market, injection-molded plastic packaging for prescription drugs, and dispensing and sprayer systems for personal care, fragrance, and other products.
The Consumer Solutions segment offers innovative end-market consumer packaging solutions and boasts an impressive client list including P&G (PG) and Coca-Cola (KO). In 2010, MWV divested its low-margin media and DVD business, resulting in a higher-margin operating segment. The segment has relatively high switching costs as MWV has moved towards being more of a value-added business by working with clients to craft creative solutions that meet their marketing and packaging needs. The segment has good exposure into emerging markets and has operational improvement potential from scaling up its relatively new healthcare business and focusing on higher margin products.
Consumer and Office (12% of sales, 19% operating margins)
Manufactures and distributes school and office products and time-management products.
Some of the business’ leading brands include Mead, Trapper Keeper and At-A-Glance products which garner premium prices. The business has attractive growth potential given its emerging markets exposure and has attractive margin potential given the 2010 divestiture of the low-growth, commodity-like envelope business.
Specialty Chemicals (11% of sales, 21% operating margins)
Manufactures and distributes specialty chemicals derived from sawdust and other byproducts of the paper-making process.
This business produces two primary products: (1) Performance chemicals used in inks, asphalt paving and adhesives (70% of total) and (2) Activated carbon used in gas vapor emission control systems for automobiles and trucks (30% of total).
The business earns high margins and is highly complementary as it monetizes by-products from the company’s core business. Additionally, the segment has significant exposure to emerging economies in need of asphalt paving to improve infrastructure and is a cyclical business which should benefit from an economic upswing as demand for roofing, autos, etc. increases as the economy improves.
Community Development and Land Management (“CDLM”)
This segment houses the company’s most unique hidden assets.
The CDLM segment was set up in 2007 and is responsible for maximizing the value of the company's landholdings in the Southeastern region of the US The CDLM segment is engaged in real estate development, forestry operations and leasing activities.
MWV owns 740k (both rural and highest and best use “HBU”) acres of land in the United States and another 130k acres in Brazil. Thanks to technological improvements, MWV utilizes very little of this land for its core operations and has therefore been looking to monetize it either through land tract sales or commercial development via JVs. Much of this land was acquired throughout the mid-20th century and has a very low tax basis.
About half of the company’s HBU land is located in Charleston, S.C. Charleston is currently undergoing an economic boom, owing to its attractive demographics, accommodative economic policies and close proximity to ports. MWV has spent the past few years entitling and improving high-value tracts and has developed or is in the process of developing a number of large Master Planned Communities and Industrial parks. Land in the Charleston area can sell for up to $5000 an acre.
Below is a detailed breakdown of the company’s land assets by state and their estimated value per acre:
South Carolina: 350k acres, $1500-$5000/acre
West Virginia: 150k acres, $800-$1000/acre
Virgina: 140k acres, $800-$1000/acre
Georgia: 50k acres, $1000-$1500/acre
Alabama: 50k acres, $1000-$1500/acre
Brazil: 130 acres, $2000-$3000/acre
When taking into account the value of future property developments and the possibility for resource discovery on the company’s land, some of which runs along the Marcellus Shale, the value of MWV’s land assets has the potential to be materially higher than these more conservative estimates.
At approximately 5.2x estimated 2011 EBITDA, adjusted for the company’s land assets, MWV currently trades at an extremely cheap multiple on a consolidated basis. This is materially beneath where MWV’s relevant peers trade, given a median multiple of 6.5x estimated 2011 EBITDA within the packaging industry, which implies you are currently getting the company’s land portfolio FOR FREE.
In light of MWV’s diverse business mix and asset holdings, however, a more appropriate valuation methodology is a sum-of-the-parts analysis.
Applying median market multiples from relevant peers to the company’s various businesses, I estimate the following enterprise values:
Packaging: $3.41bn, assuming 6.5x 2011e EBITDA of $525mm
Consumer Solutions: $2.06bn, assuming 7.5x 2011e EBITDA of $275mm
Specialty Chemicals: $1.36bn, assuming 8x 2011e EBITDA of $170mm
Consumer and Office: $1.275bn, assuming 7.5x 2011e EBITDA of $170mm
Adding in the company’s real estate assets of $1.58 billion and an over-funded pension asset of $1 billion while subtracting corporate and pension expenses as well as the company’s net debt, I estimate an equity value for the consolidated business of ~ $8.2 billion, which translates to a share price for MWV of $47 and an upside potential of 42%. Adding in the company’s $1 annual dividend, MWV shares represent a 45% total return opportunity.
Why This Opportunity Exists
MWV is trading at a deep discount to its estimated intrinsic value for a number of reasons.
First, MWV is a complicated story. The pairing of the company’s unrelated businesses inhibits analysis and causes MWV to be cast with a broad brush, despite its various segments having different earnings profiles and growth trajectories. While these businesses are attractive on a standalone basis, a number of them are non-synergistic, causing confusion amongst investors when trying to determine the company’s true underlying value, while also serving to mask the profitability of the company’s individual units.
Second, company management has exhibited poor communication around the MWV’s significant non-core assets. Specifically, management has failed to communicate to investors exactly what real estate assets the company owns and what the company’s vision is with regard to these assets. As a result, the value of the company’s real estate assets is completely ignored by the marketplace. In addition, when MWV carved out its CLDM segment in 2007, it announced a multi-decade approach to monetizing and developing its real-estate assets. For many investors, this represents an unnecessarily long time horizon for value creation.
Finally, MWV receives incomplete sell-side analyst coverage. Packaging products analysts covering the stock are not real estate experts, leading to an underappreciation of the company’s land assets and their potential value.
MWV trades at an attractive valuation on a consolidated basis and has a break-up value that is materially higher than where the shares are currently trading. In addition, the company has implemented massive cost cuts and has divested several low-margin / low-growth businesses over the past few years which should result in higher margins for the remaining business — a characteristic the market fails to give the company credit for. Finally, the company owns ~900k acres of non-core real estate assets which are not fully appreciated by the investment community, despite being worth upwards of 25% of the company’s share price.
In conclusion, on a sum-of-the-parts basis, MeadWestvaco currently trades at an estimated 42% discount to intrinsic value and represents an attractive, under-the-radar investment opportunity with multiple catalysts in place to unlock shareholder value.
Last week, one of MWV's competitors, Temple-Inland, received a buyout offer from International Paper at a 40% premium. This offer follows a continuing trend of consolidation in the packaging space and also plays perfectly into the thesis for MWV. Since MWV is currently an amalgamation of businesses, namely packaging, specialty chemicals, office supplies and real estate, it is not currently an attractive target for a strategic buyer. However, if the company were to simplify its business by spinning off or selling some of its non-core divisions, it would be able to close the current gap to its intrinsic value and would also become an attractive buyout candidate for one of its larger competitors.
On June 15, MWV will be hosting an investor day during which it plans to provide a detailed overview of its real estate holdings, which should serve to highlight some of the embedded value hidden in the company.