International Paper Beaten to a Pulp: Time to Buy?

International Paper manufactures and markets coated and uncoated freesheet, pulp, uncoated bristols, containerboard, paperboard and corrugated boxes. They also own about 300,000 acres of forest lands in the U.S. and 250,000 acres in Brazil. The slow economy is depressing revenues while the commodity boom may be increasing the value of their timber holdings on an asset basis.

Last week IP reported Q1 earnings that were down slightly from $0.45 in 2007 to $0.41 (both on continuing ops) in 2008 (see conference call transcript). The shares have reacted badly hitting a share price low not seen for more than 12 years. Is this justified? Let’s do some analysis.

The newly reduced estimates for this year now run from $1.96 - $2.11 and 2009 consensus numbers now suggest $2.33 - $2.45. Thus IP shares now trade at 13x and < 11x the low-end estimates for 2008 & 2009. The last time IP’s multiple was this low was in 1995.

While IP has not raised it dividend rate (of $1 /share annually) since 1996 the current yield is now a 20-year high of 3.92%. The payout ratio [on trailing 12-month EPS] is now the lowest it has been over the past 15 years.

Book Value climbed from $15.39 in 2002 to an estimated $20.40 in 2007 through a combination of retained earnings, share buybacks and non-strategic asset sales.

Is this an ideal environment for International Paper? No. Does a multi-year low absolute share price and a treasury bond-like yield (of 3.88%) more than compensate for that? I think so.

Here are some historical data* comparisons to consider:

*source: MSN MoneyCentral.com

If IP shares return to even 0.7x sales they will bounce back to > $35.

At only 1.7x their expected 2008 year-end book value they’ll reach > $35.

On just 17 times $1.96 in EPS we’d expect $33.32 by year-end 2008.

That implies a target price range $7.82 to $9.50 above today’s quote of $25.50 or plus 30.6% - 37.25%. Add in the yield and we’re talking very juicy total returns.

Large Holders as of December 31, 2007 [YE 2007 share price: $31.81]:

• Morgan Stanley……………..9.55%
• Capital World Investors…….7.91%
• T. Rowe Price……………….7.67%
• State Street …………………6.10%
• Franklin Resources…………5.82%
• Barclays Global Inv………...4.21%

An explosion at one of IP’s mills over the weekend also contributed to today’s share price weakness. This is clearly a one-time event.

International Paper is a world leader in its field, asset-rich and yielding a CD-like 3.92%. I think it’s worth a play at today’s multi-year low price.

If you want to play long-term but not lay out any cash there are nice LEAP put premium available if you’re willing to sell January 2009 or 2010 puts at $25, $27.50 or $30 strikes.

Disclosure: Author bought shares of IP yesterday and is short LEAP puts for the 2010 expiration date.

Comments

[VP ofCommon Sense]

Here's the catch with IP: the products they produce are mostly freight friendly commodities.

Hard rolls of paper and linerboard are very suitable for ocean liner transit due to their high density. In my opinion a bet on IP is really a bet on the dollar. If the USD continues to fall they should make record profits (strong exports), but if it falls their profits could easily go to nearly zero (strong imports).

As recently as 2004 they lost money, and their top line revenue is only up about 5% total since then. They just bought Weyerhaeuser's containerboard division which should improve the top line, but if the dollar turns, the benefits from the acquisition would otherwise be limited to 'synergy' and 'further economies of scale' from what was already two very big containerboard producers.

fake disclosure: 'synergy' and 'economies of scale' in pulp and paper are very similiar to 'goodwill' and 'intangible assets' on a balance sheet.

[VP ofCommon Sense]

And by 'falls' I mean rises or strengthens in the 4th sentence. My bad.

[thticket]

I looked this over a day or 2 back. I can't pull the trigger IP has 6.62 Billion in debt and with a market cap of 11.18b that seems like to big a number for me. Also if paper is easy to ship my don't they make it else were and ship it to the USA?

[FCharlie]

Nice. I shorted 2010 Leaps yesterday too. $20 strike, which would be a 24 year low if it really happens. I don't expect to get assigned the shares though.

[Plantinseeds]

IP was once a good company but its time has come and gone IMO.

At the end of 07 IP did not own 300k acres in the US. IP sold almost half of that from 05 - 07. IP is still looking at either closing or selling more plants in the US. One of its largest investments in paper mills over the last 3 years has been its bleach board plant in Florida. Now how does that make sense? Bleach board is used mainly in orang juice cartons. Tropicana is their largest customer in the US for that product. Tropicanan is moving more and more to plastic. The largest customer base for bleach board is in Asia.
Even with the drop of the dollar IP cannot compete with the paper mills that are coming online throughout SE Asia.

Bleach Board is IP's largest profit product.
Coated Pub is what it has the largest market share in but it is its least profitable product. You guys keep on shortin that stock, and you will own more than you want and own it at more than it will be worth IMO.

[retiredIP]

I would stay away from IP stock. IP has seen its heyday and that day is long past.

In July '05 CEO Fracci announced a 'tranformation' (short for downsizing)plan for IP. IP owned at that time 6.7 million acres of land in the US alone plus lands in Brazil and lands in Russia (long term timber lease). IP placed the entire US land base up for sale and this was sold in April '06. This was at that time the largest single transfer of privately owned land since the Louisiana Purchase. IP did retain acerage of approximately 900,000 acres which had huge real estate potential, and IP has been steadily selling these lands since.

One of the reasons for the 'transformation' was to retire debt IP was carrying from the merger with Union Camp in 1999 and the acquistion of Champion Paper in 2000. Ironically IP CEO John Fracci stated in a conference call when announcing the 'transformation' plan that IP paid "too much" for Champion Paper.

So IP finds itself in the same positon today as they were in 2005, in debt and a stock price that is virtually worthless.

CEO John Fracci has run IP into the ground in my ever humble opinion, has taken a once great company and weakened it to the point it will never return to its former glory days.

I would stay away from IP stock, for one: bad leadership under Fracci and two; he promised in '05 once the timber lands were sold IP stock would double in two years. It is two years later and IP is still a in the dumps.

Look at investing with IP only after CEO Fracci had been repalced.