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International Paper Up to Outperform

Zacks Equity Research

We have recently upgraded our recommendation on International Paper Co. (IP) from Neutral to Outperform, based on the successful implementation of $50 per ton price increase by containerboard producers in September and the accretive effect on the earnings of the company. Currently, the stock retains a Zacks #2 Rank, implying a short-term Buy rating. Other positives of the company include its merger and acquisition strategy, smooth ongoing integration of Temple Inland and expected synergies, expansion in India, Russia and China.

To elaborate, mergers and acquisitions remains International Paper’s key strategy to strengthen its businesses over the long term. The acquisition of Texas-based Temple-Inland is its largest since it acquired Weyerhaeuser Co.’s ( WY) corrugated-packaging business for $6 billion in August 2008. The company generated $60 million in synergies to date.


The transaction is expected to be accretive to EPS within one year of closing and incrementally beyond 2013. The combination will yield synergies of $240 million in the first year and $400 million by the end of 2013. Moreover, the combination will strengthen the packaging business of North America by increasing its share in the corrugated packaging market to 34% from the current level of 27%.


The International Paper-Ilim joint venture in Russia has been growing rapidly. It is currently working on two major projects, which are expected be completed by 2012 end. These projects include modernization and expansion of a pulp mill in Bratsk and a new paper machine at Koriatza mill in Russia. These represent a combined $1 billion of investment and are expected to generate over 20% returns.


In China, the International Paper-Sun joint venture is building a new consumer paperboard line that should come online in late 2012. Going forward, these initiatives will contribute to both earnings and cash flow immensely.


International Paper is working toward transforming and improving the profitability of its distribution business, Xpedx. Improvements are expected in procurement, replenishment of orders, reduced stock keeping units (:SKU) and supply chain (including fewer/larger warehouses). We believe that these initiatives will boost results and be accretive to EPS going forward.


International Paper recently hiked its annual dividend by 14% to $1.20 per share from the previous payout of $1.05. International Paper had earlier hiked its dividend by 40% to $1.05 per share in March last year from the previous dividend of 75 cents.


Through two dividend hikes, in April 2010 and subsequently January 2011, the company substantially raised its dividend payout from 10 cents to 75 cents -- a positive development for the shareholders, since the company had slashed its dividend by 90% to 10 cents in March 2009, in order to preserve cash due to the economic downturn. 


International Paper has more than doubled its free cash flow from the 2000-2004 levels. We expect International Paper to continue to utilize its sound cash flow by investing in capital projects, pursuing accretive acquisitions, reducing its total debt and returning a greater proportion of cash to shareholders through increased dividend.


Memphis, Tennessee-based International Paper is a global paper and packaging company with operations in North America, Europe, Latin America, Russia, Asia and North Africa. International Paper conducts its businesses through five segments: Printing Papers, Industrial Packaging, Consumer Packaging, Distribution (Xpedx) and Forest Products. 

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