Putting It Down on Paper By Kopin Tan
Highlighted companies: International Paper (IP), Weyerhauser (WY)
Summary: Investors 'stopped buying paper stocks a lot soon than consumers stopped buying paper.' With booming demand for paper in emerging markets and stable usage in the U.S., International Paper has shaken off the soaring costs of its raw materials (timber, chemicals, oil) to post its strongest second-quarter sales in six years. Yet the stock has barely moved in six years. IP, one of the largest landowners in the U.S., has been selling millions of acres of forestland as it removes itself from the logging business to concentrate on its core paper and packaging business. Proceeds from the sales are now expected to reach $11 billion, allowing share buybacks, debt reductions, and investment in corporate projects. Meanwhile, predictions of paper's demise due to increased computer use have simply not panned out, and the industry's consolidation and shrunken overcapacity have permitted constant raising of prices. There's a good deal of speculation that competitor Weyerhaeuser will sell its printing paper business, further removing capacity from the sector. Bottom line: Expect earnings surprises from IP, a possible dividend hike, and a price reaching 40.
Quick comment: IP's sale of its timberlands would remove the attractive element of this asset for a business of IP's sort -- forestry-related industries tends to have low correlation to the broader economy. So IP, as noted by Barron's, will be very much exposed to a general downturn of the U.S. economy. Can the fact that the company derives 20% of its revenue from outside North America compensate for that?