International Paper (NYSE:IP) Misses Q2 Sales Targets
Packaging and materials company International Paper (NYSE:IP) fell short of analysts' expectations in Q2 CY2024, with revenue up 1.1% year on year to $4.73 billion. It made a non-GAAP profit of $0.55 per share, down from its profit of $0.59 per share in the same quarter last year.
Is now the time to buy International Paper? Find out in our full research report.
International Paper (IP) Q2 CY2024 Highlights:
Revenue: $4.73 billion vs analyst estimates of $4.76 billion (small miss)
EPS (non-GAAP): $0.55 vs analyst estimates of $0.42 (31.5% beat)
Gross Margin (GAAP): 29%, up from 28.2% in the same quarter last year
Free Cash Flow of $167 million, up 16% from the previous quarter
Market Capitalization: $15.95 billion
"Reflecting on my first 90 days, I am confident in our teams' ability to unlock substantial value at IP," said Andy Silvernail, Chief Executive Officer.
Established in 1898, International Paper (NYSE:IP) produces containerboard, pulp, paper, and materials used in packaging and printing applications.
Industrial Packaging
Industrial packaging companies have built competitive advantages from economies of scale that lead to advantaged purchasing and capital investments that are difficult and expensive to replicate. Recently, eco-friendly packaging and conservation are driving customers preferences and innovation. For example, plastic is not as desirable a material as it once was. Despite being integral to consumer goods ranging from beer to toothpaste to laundry detergent, these companies are still at the whim of the macro, especially consumer health and consumer willingness to spend.
Sales Growth
A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. International Paper struggled to generate demand over the last five years as its sales dropped by 4.3% annually, a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. International Paper's recent history shows its demand has stayed suppressed as its revenue has declined by 6.9% annually over the last two years. International Paper isn't alone in its struggles as the Industrial Packaging industry experienced a cyclical downturn, with many similar businesses seeing lower sales at this time.
We can better understand the company's revenue dynamics by analyzing its most important segments, Industrial Packaging and Cellulose Fibers, which are 83% and 15.1% of revenue. Over the last two years, International Paper's Industrial Packaging revenue (containers, displays, bins) averaged 5.3% year-on-year declines while its Cellulose Fibers revenue (materials) averaged 1.1% declines.
This quarter, International Paper's revenue grew 1.1% year on year to $4.73 billion, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 5.4% over the next 12 months, an acceleration from this quarter.
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Operating Margin
Read More Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
International Paper was profitable over the last five years but held back by its large expense base. It demonstrated mediocre profitability for an industrials business, producing an average operating margin of 7%.
Analyzing the trend in its profitability, International Paper's annual operating margin decreased by 6.7 percentage points over the last five years. The company's performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn't pass those costs onto its customers.
In Q2, International Paper generated an operating profit margin of 5.9%, down 1 percentage points year on year. Since International Paper's operating margin decreased more than its gross margin, we can assume the company was recently less efficient because its general expenses like sales, marketing, and administrative overhead increased.
EPS
Read MoreAnalyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Sadly for International Paper, its EPS declined more than its revenue over the last five years, dropping by 20.1% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
We can take a deeper look into International Paper's earnings to better understand the drivers of its performance. As we mentioned earlier, International Paper's operating margin declined by 6.7 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For International Paper, its two-year annual EPS declines of 32.2% show it's continued to underperform. These results were bad no matter how you slice the data.
In Q2, International Paper reported EPS at $0.55, down from $0.59 in the same quarter last year. Despite falling year on year, this print easily cleared analysts' estimates. Over the next 12 months, Wall Street expects International Paper to grow its earnings. Analysts are projecting its EPS of $1.78 in the last year to climb by 47.6% to $2.63.
Key Takeaways from International Paper's Q2 Results
We were impressed by how significantly International Paper blew past analysts' EPS expectations this quarter. We were also glad its Cellulose Fibers segment revenue topped Wall Street's estimates. On the other hand, its consolidated revenue unfortunately missed. Overall, we think this was a mixed quarter. The stock traded down 2.9% to $44.65 immediately after reporting.
So should you invest in International Paper right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.