Leading producer of renewable fiber-based packaging and pulp products, International Paper Company (IP) is well-positioned for solid long-term growth, driven by growing demand for eco-friendly packaging materials, continued innovation to boost quality and productivity, and enhanced commercial agreements to capture value.
Given solid fundamentals and a strong outlook, investors could consider buying this top paper stock, trading under $40. Throughout this piece, I will discuss various reasons why I am extremely bullish on this stock.
The trend of using eco-friendly and bio-degradable materials, including paper for packaging instead of plastic, has been gaining traction over recent years. Governments worldwide are making strict rules to combat plastic pollution. Given the switch to sustainable options, the demand for paper-based packaging solutions has increased significantly, which should primarily benefit paper and packaging giant IP.
Furthermore, the Covid-19 pandemic resulted in consumer purchasing behavior shifting to online. A surge in e-commerce is one of the major driving forces that has spiked paper packaging demand over the past few years. Also, technological advancements have led to an enormous expansion in the paper and pulp industry. One of the recent tech trends is the new smart sensor technology.
According to a report by Visiongain, the global paper packaging market is expected to grow at a 5.2% CAGR by 2033.
Despite the challenging macro environment, IP operated well in the first quarter of fiscal year 2023. The company executed its highest maintenance outage quarter and realized $65 million of incremental year-over-year earnings benefit from its Building a Better IP initiatives. During the quarter, its mill operating performance was solid. Also, there was a meaningful reduction in energy & fiber costs.
Furthermore, the paper and packaging products company returned $319 million to shareholders through $157 million in share repurchases and $162 million in dividends in the first quarter. IP pays a $1.85 per share dividend annually, yielding 5.35% on the current share price. Its four-year dividend yield is 4.60%. The company’s dividend payouts have increased at a 0.8% CAGR over the past five years.
“Looking ahead,” Mark Sutton, IP’s Chairman, and CEO, “we expect the demand environment to improve throughout the year as customer inventory destocking runs its course. We remain focused on serving our customers’ needs, while optimizing our system to drive out high marginal costs and maximizing value for our stakeholders.”
Shares of IP have gained 4% over the past nine months to close the last trading session at $34.56. Moreover, Wall Street analysts expect the stock to hit $38.05 in the near term, indicating a potential upside of 10.1%.
Here is what could shape IP’s performance in the near term:
Solid Financials
In the first quarter that ended March 31, 2023, IP’s net sales from Global Cellulose Fibers segment increased 14.2% year-over-year to $811 million, and its Corporate and Inter-segment sales were $126 million, up 4.1% year-over-year. The company’s adjusted operating earnings per share rose 3.9% from the year-ago value to $0.53.
Also, as of March 31, 2023, IP’s total current assets and total assets came in at $6.62 billion and $23.77 billion, respectively.
Impressive Historical Growth
IP’s revenue and net income have grown at 4.9% and 7.1% CAGRs over the past three years. Also, the company’s EPS has increased at a 39.4% CAGR over the same time frame, while its total assets have grown at a CAGR of 6.2%.
Mixed Analyst Estimates
Analysts expect IP’s revenue and EPS for the fiscal year 2023 to decline 4.7% and 11.8% year-over-year to $20.16 billion and $2.81, respectively. However, the company’s revenue and EPS for the fiscal year 2024 are expected to increase 0.3% and 4.1% year-over-year to $20.22 billion and $2.92, respectively.
Discounted Valuation
In terms of forward non-GAAP P/E, IP’s 12.32x is 5.6% lower than the 13.05x industry average. Its forward EV/Sales of 0.86x is 40.4% lower than the 1.44x industry average. Also, the stock’s forward EV/EBITDA multiple of 6.77 is 7.6% lower than the industry average of 7.32.
Furthermore, IP’s forward Price/Sales multiple of 0.60 is 43.9% lower than the industry average of 1.07. And the stock’s forward Price/Cash Flow of 6.05x is 17.1% lower than the 7.30x industry average.
High Profitability
In terms of the trailing-12-month levered FCF margin, IP’s 5.02% is 18% higher than the 4.25% industry average. Likewise, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 19.81%, 8.24%, and 6.28% compare to the industry averages of 11.31%, 6.83%, and 5.34%, respectively.
POWR Ratings Show Promise
IP’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. IP has a B grade for Value and Quality, consistent with lower-than-industry valuation and higher-than-industry profitability, respectively.
IP is ranked #2 out of 11 stocks in the B-rated Industrial - Paper industry.
Beyond what I have stated above, we have also given IP grades for Growth, Sentiment, and Momentum. Get access to all IP ratings here.
Bottom Line
Despite a challenging and dynamic macro environment, IP performed well in the first quarter of 2023. Furthermore, analysts are bullish about the company’s long-term prospects, driven by strong demand for sustainable packaging materials amid a surge in e-commerce and growing government initiatives to reduce plastic use.
Given its solid historical growth, reliable dividend, low valuation, robust profitability, and promising growth prospects, it could be wise to buy this paper stock now.
How Does International Paper Company (IP) Stack Up Against its Peers?
IP has an overall POWR Rating of A. One could also check out these other stocks within the Industrial - Paper industry with an A (Strong Buy) or a B (Buy) rating: Resolute Forest Products Inc. (RFP),Oji Holdings Corporation (OJIPY), and Sappi (SPPJY).
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IP shares were trading at $32.54 per share on Thursday morning, down $2.02 (-5.84%). Year-to-date, IP has declined -4.91%, versus a 6.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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