International Paper a Good Pick in Industry
- By Mrinalini Chaudhuri
International Paper (IP) is a global leader in packaging and paper with manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. Its businesses include industrial and consumer packaging along with uncoated papers and pulp. Headquartered in Memphis, Tennessee, the company employs approximately 55,000 people.
Warning! GuruFocus has detected 2 Warning Signs with IP. Click here to check it out.
The intrinsic value of IP
It posted first first-quarter results and is poised to grow. The results were driven by continued strong results from North American Industrial Packaging and improving performance in papers businesses around the globe. The company delivered a solid performance in a tough economic environment.
First quarter results
It reported first quarter 2016 net earnings of $334 million or 81 cents per share. Operating earnings were $330 million or 80 cents per share.
Net sales during the quarter were $5.1 billion, which was $5.5 billion during the prior year quarter. The decline was due to the IP-Sun joint venture in the early fourth quarter of 2015.
Business segment operating profits were $497 million, which was $623 million in the prior year quarter.
Free cash flow was $311 million and cash from operations was $620 million.
Segment wise results
Industrial Packaging:A Operating profits during the first quarter were $433 million.
Printing Papers:A Operating profits were $85 million.
Consumer Packaging:A Operating profits during the quarter were $25 million, which was $38 million in the prior year quarter.
Strong attributes of the quarter
The company remained focused on productivity improvements
Allocated capital to high return investments
Generated free cash flow
Focus
Meeting customersa needs
Running business safely and reliably
Controlling spending
Strengthening workforce
Current investment to increase North American fluff pulp capacity .
Initiatives
It announced plans to invest $300 million in 2016 and 2017 to further improve the North American containerboard mill system, enhance product quality, and reduce manufacturing and delivery costs. These projects are expected to have a collective internal rate of return of 20%.
It doubled manufacturing footprint for paper cups and food containers at its facility in Kenton, Ohio. Production continues to ramp up to support the consumer-driven demand for sustainable and renewable products.
It began converting its Riegelwood, N.C., coated paperboard mill to fluff pulp production; this incremental 400,000 tons of fluff pulp capacity will allow us to meet the customersa global growth demand. Production will ramp up mid-2016 with on-going flexibility to shift between softwood and fluff production based on market demand.
Acquisition plans
The company has entered into an agreement to purchase Weyerhaeuser's pulp business. Under terms of the agreement, IP will acquire five pulp mills and two converting facilities that produce fluff pulp, softwood pulp, and specialty pulp for a number of consumer applications including diapers, other hygiene products, tissue, and textiles. With this, the company plans to position itself as the premier global supplier of fluff pulp and enhance its ability to generate additional free cash flow.
On a concluding note
The company invested in cost reduction projects to drive margin improvement and offset cost inflation, and initiated strategic investments to generate long-term value.
After six consecutive years of higher than cost-of-capital returns, the company is confident that it can sustainably generate healthy returns and continue to improve the company. It generated strong free cash flow of $1.8 billion in 2015, and $3.65 earnings per share, the highest in 20 years. It is one of the most successful companies in the paper industry. The company is maintaining leadership positions in attractive markets, and generating substantial free cash flow. I would recommend this company as a buy.
Disclosure: I do not hold any position in the company.
Start a free 7-day trial of Premium Membership to GuruFocus.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Signs with IP. Click here to check it out.
The intrinsic value of IP
