This Multi-Billion Dollar Hedge Fund Loves Paper, Should We?

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The multi-billion dollar hedge fund, Senator Investment Group, run by former York Capital Management employees, Douglas Silverman and Alexander Klabin, now own over 23 million International Paper (NYSE: IP) shares. This is a five-fold increase from the 4.18 million shares owned by the fund at the end of 2012, giving the company ownership of 5.2% of IP's shares. Senator had International Paper as its sixth largest holding at the end of 2012.

Who Is International Paper? 

International Paper is a global paper and packaging company, serving markets in in North America, Europe, Latin America, Russia, Asia and North Africa. The company managed to post EPS during the fourth quarter 2012, which beat estimates by 6%, thanks in part to the accretive acquisition of Temple-Inland. 
IP's Growth Initiatives

One of International Paper's key strategies includes pursuing strategic acquisitions. This includes the recent acquisition of Texas-based Temple-Inland, which is the company's largest since acquiring Weyerhaeuser's corrugated-packaging business for $6 billion in August 2008. This helped IP meet its $300 million synergy target a year ahead of schedule, and IP now expects an additional $100 million in synergies before the full Temple-Inland integration is complete.
Moreover, the combination will fortify the packaging business of North America by increasing its share in the corrugated packaging market to 34% from the current level of 27%. Other key initiatives includes those in Russia, China and Brazil, namely its joint venture in Russia for a pulp mill in Bratska and a new paper machine at the Koryazhma mill in Russia.
Other major paper companies include Domtar Corp (NYSE: UFS), Clearwater Paper Corp (NYSE: CLW) and P.H. Glatfelter Company (NYSE: GLT). Domtar designs, manufactures and distributes a range of fiber-based products, including communication papers, specialty and packaging papers, and adult incontinence products. The industry tailwinds are expected to see revenues increase some 1% in 2013 after declining 2.3% in 2012. 

The headwind for Domtar is the expectation that pulp prices for 2013 will remain weak. Domtar reported fourth quarter EPS that came in at $1.31, compared to $1.87 for the same period a year ago. This was also below analysts' estimates of $1.40, but new ventures in personal care and specialty papers should help the company longer-term; still, hedge funds appear to be bearish on the company for now.

Clearwater is a producer of private label tissue and paperboard products, with a focus on products primarily manufactured in the U.S. and Canada. One of the big drivers for 2013 should be its new tissue machine. Demand for tissue is expected to expand along with a rising population. Clearwater is well positioned in the private label tissue market and has an opportunity to increase its share in the Eastern U.S. Clearwater managed to report 4Q earnings results that had EPS of $0.84, beating consensus by $0.04 and well above $0.55 from the same quarter last year, but I am not a fan of its overexposure to the tissue market.

P.H. Glatfelter Company manufactures specialty papers and fiber-based engineered materials. P.H.'s major growth area includes tea bags, which should continue to see impressive demand on the back of a rising economy. P.H. is also looking to grow via acquisitions, with its pending $209 million acquisition of Dresden Papier. Dresden makes non-woven wallpaper materials, with P.H. expecting the planned acquisition to be accretive to EPS by $0.25 annually upon completion of the deal. The deal announcement and a recent 11% increase in its dividend payment has already lifted the stock 30% year to date. 

Don't Be Fooled

International Paper pays the highest dividend yield at 2.6%, compared to Domtar's 2.3% and P.H. Glatfelter's 1.7%. The stock does trade at one of the highest price to earnings ratios, but it may well be justified given IP's growth prospects. Utilizing various joint ventures and cost cutting measures, analysts expect EPS to grow at a 5-year annualized rate of 30%, compared to Clearwater's 10% rate, Domtar's 0% and P.H.'s 14%, making IP one of the best bets in the paper industry (see how hedge funds are trading IP).

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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