Looking Deep Into International Paper

| About: International Paper (IP)

International Paper (NYSE:IP) is the largest company of its competitors, having a market capitalization of $10.21 billion. The next biggest is Domtar Corp (NYSE:UFS), with a market capitalization of $2.50 billion. In the paper and paper packaging industry, International Paper currently holds a market share of 25%.

Its top three principle products and services are industrial packaging, distribution, and printing paper, having a percentage of 2009 sales of 38%, 28%, and 22% respectively.

It recently acquired Weyerhaeuser (NYSE:WY), who is the largest United States distributor of lumber and wood. Because of this, International Paper does not have to rely on an outside supplier, which will in-turn reduce its cost of production. Weyerhaueser has been seeing great optimisim in the market, coming from a great quarter, becoming a REIT and having a special dividend payout.

Stock Price Shows Investor Optimism

Looking at the trend of the company’s revenue and performance, it is expected that the stock price will show a positive trend also. Since the stock price represents how people feeling about the company, it shows that people are really optimistic. In the course of one year, from last year June 15, 2009 till June 10, 2010, the stock price has returned a total of 45.18%, while the paper and paper packaging index had a return of 26.92% and the S&P 500 returning 15.36% in the same time period.

Another sign of optimism from the company was the increase in dividends. On May 13, 2010, the company increased dividend from 2.5¢ to 12.50¢, increasing by 400%.

International Paper Seeing Modest Increase in Revenue

For the past couple of years, International Paper has been increasing revenue and improving its profit margin. From 2007 to 2009, International Paper increased its revenue by 6.74%, going from $21.89 billion to $23.37 billion. As its revenue have been increasing, International Paper has also been decreasing its profit margin, meaning the company’s expenses have been increasing also. In 2007, the company had a profit margin of 5.34%, but at the end of 2009, its profit margin fell to 2.84%. Currently, International Paper’s profit margin is 1.2% compared to an industry average of 3.9%. While its profit margin is below the industry average, its gross margin is currently 31.4%, which is well over the industry average of 22.4%. This difference between gross profit and profit margin can be interoperated as International Paper having a good cost of sale, but also having large and maybe unnecessary expenses.

From looking at the company’s income statement, it is apparent that restricting and other expenses increased. From 2007 to 2009, the expenses increased by 1324.21%, going from $95 million to $1.35 billion. This rise in expense can be attributed to its acquisition of Weyerhaeuser, which took place on August 4, 2008.

(Numbers in millions)

International Paper

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Domtar Corp

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Boise Inc.















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Looking at the chart, it shows how much the restructuring charge and other charges such as the interest expense, affected the company’s profit margin. International Paper is the most efficient, in reference to cutting costs, ie. cost of products sold. Although International Paper has the lowest profit margin amongst its competitors, it still has the highest gross margin, which shows how resourceful and efficient the company is.

Past 5 Years' Growth and Next 5 Years' Growth

EPS is usually a tool used to track the growth of a firm. Within the past five years, EPS for International Paper has decreased by -3.70%, while the industry as a whole has increased by 13.50%. Though its EPS has been lagging, analysts have estimated that for the next 5 years, Internationals Paper's EPS will grow by 2.5%.

Current Financial Health

As of the past year, 2009, International Paper had a debt to equity ratio of 3.08, meaning for every $1 shareholders own of the company, the company owes creditors $3.08. This debt to equity is not too much of a problem with companies such as this, especially in manufacturing, where the debt to equity ratio is usually 2 or above. Also, International Paper has a current ratio of 1.88, which is exceptional because it is able to meet all of its current obligations. Looking at its quick assets, one can also come to the conclusion that International Paper is in great shape. Its current quick ratio is 1.14, which means it has enough cash and cash equivalent to meet any of its short term obligations. Normally, firms have a quick ratio of .5, so having a quick ratio of 1.14 is a great hedge over any short term risk.

SWOT Analysis



Strong balance sheet

Sustainable amount of cash on hand

Low cost of production

Distribution channels all over the world

Lack of sales in international market

High interest expense

Sales in forest products decreased by 111.86% since 2007



New acquisition of Weyerhaeuser (largest US lumber and wood distributor) can make it difficult for competitors to find competitive prices for lumber

Joint ventures in emerging BRIC countries, Brazil, Russia, and China

Highly cyclical industry

People going “green” can draw sales away from paper

Analyst predict prices to rise in 2010 as opposed to 2009

Disclosure: No position