International Paper is Restructuring its Operations

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Sep 13, 2014

In this article, let's take a look at International Paper Company (IP, Financial), a $21.62 billion market cap company, which is a leading worldwide producer and distributor of printing papers and packaging products.

Several Transformations

The company has made several transformations to its business. For example, it passed from 12 operating units to 3 in the last 9 years. Also, in that time frame, it focused on divest in timberland and noncore businesses. Moreover, due to two strategic acquisitions, it has strengthened its position in the industrial packaging. In 2008, it acquired the packaging division of Weyerhaeuser's and more recently Temple-Inland, in 2012, which is expected to generate about $400 million of synergies within the first two years. These deals have a good impact on market share, almost 33% of the North American containerboard industry, far away its closest competitor, Rock-Tenn, which had 19%.

A potential risk in this kind of deals is the process of integration with the new companies, but it resulted very effective in the case of the Temple-Inland acquisition, because it generated synergies above what we can expected.

Other Segments

Segments which include legacy printing papers and consumer packaging would need more attention from management in the upcoming future. Although more than 75% of total revenues came from the U.S., it also has operations or assets in promising regions such as the BRIC countries and in Eastern Europe, too.

Russian Operations

The joint venture with Ilim in Russia, extended the firm´s global reach. Ilimis the largest pulp and paper company and has two pulp mills in Siberia that provide extended markets like China.

Dividends & Share Repurchases

The company plans to focus on returning capital to shareholders: dividends plus share buybacks (from $1.5billion share repurchase authorization it has $970 million remaining).

The company has a strong balance sheet and good cash that allows the company to hike its dividend payout of $1.4 per share, reflecting a dividend yield of 2.7%, higher than the industry average of 2.18% and the S&P 500 median of 2%. Dividends have been paid since 1946 and it is expected strong dividend growth of more than 10% annually in the future.

Revenues, Margins and Profitability

Looking at profitability,revenues declined by 1.67% and led earnings per share decreased in the most recent quarter compared to the samequarter a year ago ($0.38vs $0.52). During the past fiscal year, the company increased its bottom line. It earned $3.01 versus $1.71 in the prior year. This year, Wall Street expects an improvement in earnings ($3.55versus $3.01).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
IP International Paper 11.75
NP NeenahPaperInc 17.79
MERC Mercer International Inc 2.13
FBR FibriaCelulose SA 3.41
WPP Wausau Paper Corp -13.54
 Industry Median 8.36

The company has a current ROE of 11.75% which is higher than the one exhibit by Mercer (MERC, Financial), FibriaCelulose (FBR, Financial) and Wausau Paper (WPP, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Neenah Paper(NP, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 24.9x, trading at a premium compared to an average of 20.0x for the industry. To use another metric, its price-to-book ratio of 2.9x indicates a premium versus the industry average of 1.77x while the price-to-sales ratio of 0.8x is belowthe industry average of 0.82x.

As we can see in the next chart, the stock price has an upward trend in the five-year period.

03May20171359001493837940.png

Final Comment

As outlined in the article, International Paper has assets and joint ventures that should boost revenues in the future because we believe they have positive effects on the growth of the company.

The firm invested or made acquisitions in paper plants in Brazil and packaging operations in China and Russia, even though we see challenges in Europe due to a slowdown in Russia.

Hedge fund gurus like Richard Perry (Trades, Portfolio), David Dreman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Richard Snow (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors.

Disclosure: Omar Venerio holds no position in any stocks mentioned