A Good Buy for Both Near and Long Term

By Ashish Sharma - August 15, 2012 | Tickers: UFS, IP, PKG, SON, WPP | 0 Comments

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International Paper (NYSE: IP) is the largest global producer of paper products. Containerboard (Industrial Packaging) and Printing & Writing Papers are the two most important businesses for International Papers, contributing ~75% of earnings. Last month, International Paper reported normalized EPS of $0.46 in 2Q12 in-line with the consensus estimate of $0.46. Adjusted operating profit was up 32% quarter over quarter for Industrial Packaging but significantly down for Printing Papers (-27% q/q) and Consumer Packaging (-34% q/q). I believe that International Papers' 2Q results were impacted by a full quarter of Temple-Inland earnings, incremental synergies and higher export prices in Industrial Packaging. I am optimistic about this stock as:

• International Paper is well positioned to generate significant and stable free cash flow that will be returned in increasing amounts to shareholders.
• The containerboard business appears to have additional earnings runway
• International Paper is now achieving good and faster capital returns with the potential for additional increases.

Global containerboard (contributing ~45%) demand has been very strong recently and I expect that the demand will continue to increase. The company recently announced that July trends thus far are in-line with the expectations and management seemed optimistic on both demand and price increasing sequentially in most of their export markets. Management seems focused to keep the inventory in check and is using the tighter supply setting to boost prices. Additionally, a positive structural shift in its key markets is increasingly supportive to raise containerboard prices. I believe that the company will be able to execute its plan of $50/ton price increase in 3Q, which eventually will result in a significant earnings upside.

International Paper has a $400 million synergy target associated with the Temple-Inland acquisition to be achieved in 24 months. In 2Q, the company generated $60 million of synergies (+$0.08 sequentially). SG&A synergies are largely complete, while the box plant efficiency target is running at about 70%. As a result, International Paper has been able to bring TIN synergies to the bottom line offsetting a tough macro environment and drag in pulp. Upside from the expectations was driven by strength in Industrial Packaging. Looking forward, I believe the trajectory of the synergy ramp will continue during the next two quarters. Further, I believe that acquisition has been proven meaningfully accretive to the business and more progress could be seen in all four Temple-Inland synergy categories during the next two quarters. Company have many other initiatives beyond containerboard/TIN. I believe that the following projects have potential to further increase profits in near term:-

• Converted fluff pulp line at the former Franklin paper/board mill showing good results.
• Recovery boiler project at Mogi Guacu in Brazil has been targeted to generate $50 million savings.
• The restructuring in xpedx is targeting $120 million profit improvement.
• The two projects in Ilim have an opportunity to drive Ilim EBITDA up $190 million
• The new coated board machine at the Sun joint venture has potential to raise EBITDA in China by $75 million.

The following table summarizes the forward PE and expected EPS growth of International Paper and its competitors including Wausau Mosinee Paper (NYSE: WPP), Sonoco Products Company (NYSE: SON), Packaging Corporation of America (NYSE: PKG), Domtar Corporation (NYSE: UFS):-

Clearly, International Paper is undervalued as compared to its competitors. Expected EPS growth of 35.7% is best-in-class but not fully factored into the company’s valuation. Also, International paper offers a strong dividend yield of 3.2%. Even if shares don't surge, the stock'ss strong dividend could provide a cushion in today's sideways moving market. Growth drivers like global expansion, the profit improvement program and strong dividend yield will provide a premium valuation in the near term.

International Paper has been a strong leader in the consolidation of several key paper grades in North America over the past decade and now holds greater than 20% share in each. I believe International Paper’s international exposure as a means of achieving above average growth longer term and diversification. Also, the company’s recent execution on TIN synergies has been a key differentiator versus peers. Given its low-cost structure, superior growth potential and attractive dividend (3.2% yield) and benefits from initiatives/projects, I rate it a buy.

Note: The article was originally published on TheAnalystHub.com. For more in-depth research articles please visit our site today.

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