Making Paper for Your Portfolio

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International Paper (NYSE: IP) is one of those large-cap stocks you buy and put away for the long term. That is, until an activist investor gets involved. I like investing in stocks with catalysts, and as a result, I found International Paper compelling back in May, when Loeb laid out his thesis for IP.

The company is the world's largest paper- and forest-products company, with the leading market share, around 35%, in containerboard manufacturing in the U.S.

Loeb believes that IP's de-leveraging, where it has reduced debt by $10 billion over the last four years, should afford it the opportunity to start throwing off some of its robust free cash flow to shareholders. Loeb notes that IP should generate $2 in free cash flow per share in the near term, supporting a solid dividend boost.  

The company was up nicely a couple of weeks ago, 6% to be exact, which is a large move for an "un-sexy" large-cap paper company. This was due to a positive 2Q EPS report. The company managed to post EPS of $0.64, which was up over 20% year-over-year and $0.08 above consensus.

Other big news is that every segment saw growth; industrial packaging revenue was up 10% year-over-year, the printing-paper segment was up 2% and consumer packaging advanced 10%. 
 
The end-uses of IP's products are, well, endless. This includes brochures, pamphlets, books, direct mail, envelopes, forms, cups, lids, plates, and packaging for tobacco, cosmetics, and pharmaceuticals.
 
One of the nice things about IP is that it's not satisfied with just dominating the U.S. paper market. The company is making investments in the likes of the BRIC countries (Brazil, Russia, India and China). Earlier this year, IP completed it joint venture deal with Brazil's Jari Celulose for three containerboard mills and four box plants in Brazil. 
 
Playing with paper
 
A couple of other major paper companies include Packaging Corp of America (NYSE: PKG) and MeadWestvaco (NYSE: MWV)During the 2Q, Packaging posted EPS of $0.71, versus the $0.49 for the same period last year, and above the $0.65 consensus. The company expects revenue to be up 12% in 2013 and 4% in 2014. Impressive numbers. 

Helping drive the rise in revenue includes the fact that prices were upped last year for the first time in two years. Last month, Jefferies reiterated its hold rating, but upped its price target from $48 to $49. Jefferies said that it is "...encouraged [Packaging Corp of America] continues to see strong demand in July and has realized the full box price increase already."
 
MeadWestvaco is another major paper maker. The company is expected to see sales up 3% in 2013 and 2014. Thus, MeadWestvaco is working to reduce costs across the board. This is expected to save between $65 and $75 million in costs by the end of 2014. MeadWestvaco is eliminating various product lines while expanding in new areas. 
 
This includes expansion in Brazil. The company has invested over $480 million for a paperboard machine that will double the capacity of its Tres Barras mill. The investment in Brazil is expected to boost revenue by 50% and more than double the operating earnings of the industrial segment. Other key areas of expansion include India. MeadWestvaco purchased Ruby Macons, India's market leader in corrugated materials.
 
Bottom line

IP still only trades at 20 times earnings, below the major peers...
 
 
And what's more is that the stock trades at only 11 times forward earnings and offers investors a 2.3% dividend yield. I'm not a huge fan of the paper business, but with Loeb, I'll make an exception. However, I'll be avoiding Packaging Corp and MeadWestvaco due to their low growth prospects. 
 

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Marshall Hargrave owns shares of International Paper Company. 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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