Bear of the Day: International Paper (IP)

Shares of International Paper (IP) have tumbled over 25% in the past year as part of a much broader industry downturn that has seen the paper market slide over 45%. And International Paper’s outlook doesn’t appear as though it will inspire much investor confidence anytime soon.

Quick Overview

International Paper is a global paper giant that produces renewable fiber-based packaging, pulp, and paper products. The Memphis, Tennessee-based firm manufactures products around the world and its more than 25,000 customers helped it pull in $23 billion in revenue last year. Overall, 69% of the company’s total sales come from its Industrial Packaging division, with most of that coming from its North American segment. This includes packaging and boxes used in everything from processed food and beverages to durable/non-durable goods.

The firm also runs a North American recycling business. Meanwhile, International Paper makes pulp used in tissue, diapers, and other personal hygiene products. Its global Cellulose Fibers division accounts for 12% of revenue. Lastly, IP produces a variety of papers geared toward both businesses and households, which makes up 19% of sales.

International Paper is still a global powerhouse, but it faces some tough market conditions. In April, Bank of America Merrill Lynch analyst George Staphos downgraded IP stock on the back of larger, non-company specific forces. “Recent containerboard and box data suggests producers are having challenges managing excess inventory and production, and pricing could remain subdued for the foreseeable time,” Staphos wrote in a note. Last quarter, IP’s net sales slipped roughly 2.8% and fell short of our estimates.

 

 

 

 

Outlook & Earnings Trends

Looking ahead, International Paper’s third-quarter fiscal 2019 revenue is projected to come in at $5.73 billion, based on our current Zacks Consensus Estimates. This would mark a similar 2.8% decline from the year-ago period. The firm’s Q4 sales are then projected to fall roughly 3.7% to help bring full-year fiscal 2019 sales down 1.9%. Peeking further ahead, fiscal 2020 revenues are expected to come in roughly 1% below our current-year estimate.

The bottom end of the income statement looks much worse for International Paper. The company’s adjusted Q3 earnings are projected to tumble approximately 36% from the prior-year quarter. IP’s fourth-quarter EPS figure is expected to sink over 25%. And the firm’s full-year fiscal 2019 earnings are projected to slip 15.6%, with 2020 expected to come in 13.3% lower than our current-year estimate.

 

 

 

 

Bottom Line

International Paper is still a strong company that returns money to investors through dividends and repurchases. The firm also boasts some solid valuation metrics, which are somewhat inflated based on its recent downturn. Nonetheless, IP’s earnings estimate revision activity has trended heavily in the wrong direction recently. This helps it earn a Zacks Rank #5 (Strong Sell) and a “D” grade for Momentum in our Style Scores system.

Investors still interested in the overall paper industry might want to look elsewhere, as it ranks in the bottom 5% of our 256 Zacks Industries. However, Neenah Paper, Inc. (NP) does currently boast a Zacks Rank #2 (Buy).

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