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Doom and Gloom in Paper Industry Is Overrated

- By Mark Yu

Set to report its fourth-quarter and full-year 2018 results on Jan. 31, International Paper Co. (IP) has, so far, been able to meet and consistently beat Wall Street's earnings expectations.

The $18 billion paper and packaging company is expected to deliver an average estimate of $5.28 in earnings per share on $23.3 billion in sales for its 2018 operations--2.9% and 7% growth from 2017.

This is impressive as paper use appears to be on a decline. The industry-wide application of email and other sorts of digital transmission of information has clearly not disrupted International Paper--one of the world's largest producers of printing and writing paper--entirely.

In its recent year-to-date report, the company indicated it was able to squeeze out more profit from its major line of business--industrial packaging--compared to the previous year and grew its revenue modestly at 6.3% year over year.

International Paper's revenue and profits in the printing paper business have also increased over the same period.

Being down 28% in the past 12 months, International Paper's stock currently trades at a forward multiple of 8, whereby it has traded at an average multiple of 19 times over the past three years.

Analysts have an overall overweight recommendation on the stock with a price target of $52.85 a share compared to $44.43 at the time of writing.

One thing some investors may see as a turnoff is the company's leveraged balance sheet. As of its recent filing, International Paper has a debt-equity ratio of 1.6-- down from its prior-year ratio of 1.7.

Nonetheless, the consistently growing dividend payouts over the past decade may help ease some of this concern. Even though the company was recording hefty losses during the Great Recession, it was still able to eke out $1 per share in dividends in 2008 and 33 cents per share in 2009.

The current trend of e-commerce will certainly help International Paper's packaging business cruise along despite the overrated paperless era, which appears to be inevitable.

Disclosure: No shares in International Paper.

This article first appeared on GuruFocus.