Shares of International Paper Company IP have lost 21.9%, year to date, compared with the industry’s decline of 28.1%. This downside resulted from the coronavirus pandemic’s unfavorable impacts, bleak demand for printing paper, lower price and mix as well as higher input costs.
Factors Plaguing International Paper’s Business
The coronavirus pandemic has affected paper consumption in schools, offices and businesses due to the stay-at-home measures implemented to contain the spread of the virus, in turn straining paper demand. The company has also witnessed unprecedented decline in commercial printing segments due to the significant pullback in print advertising. This will hurt the Printing Paper segment’s performance in the near term. Further, the transition to digital media continues to affect paper demand.
In the wake of the uncertainty regarding the impact and duration of the pandemic, the company has withdrawn the current year guidance for adjusted EBITDA and free cash flow. Lower price and mix is expected to have dented the industrial packaging segment’s performance during the June-end quarter. Volume is expected to have registered a decline and input costs might have flared up on higher recovered fiber cost. Operations and costs might have muted earnings in the global cellulose fibers segment during the second quarter.
Will the Stock Rebound?
Despite the aforementioned headwinds, the company is witnessing robust demand driven by processed food, proteins, chemicals, tissue and towel in e-commerce. The company will continue to benefit from the growing e-commerce demand as it has become a primary spending channel for customers owing to the containment measures amid the pandemic.
International Paper has been undergoing restructuring initiatives to transform itself into a core packaging company. The company has strategically offloaded businesses in China to focus more on its U.S. operations. It believes it could cater to the Chinese and Asian markets more effectively by supplying globally competitive products primarily through its Ilim joint venture in Russia, as well as through exports from the United States and other parts of the world. International Paper also completed the divesture of its consumer packaging business in North America to Graphic Packaging Holding Company GPK. The divesture helped the company maximize the value of the North American Consumer Packaging business by combining it with Graphic Packaging, while also focusing on its core businesses and strengthen the balance sheet.
Mergers and acquisitions are a key strategy for International Paper to strengthen its packaging business. In North America, the company envisions a large opportunity within its industrial packaging businesses, which continue to generate the best margins in the industry. The company is taking initiatives to drive further margin expansion across the business.
International Paper has completed the acquisition of leading timberland owner Weyerhaeuser Co.’s pulp, which has strengthened its position in the global fluff pulp market and augmented the operating cash flow. The acquisition has provided it with a higher flexibility to manage the wide portfolio of products for meeting customer needs through superior R&D capabilities and priceless patent portfolio.
The company currently carries a Zacks Rank #3 (Hold) and has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) 2 (Buy) or 3, offer the best investment opportunities.
The company outpaced the Zacks Consensus Estimate in all of the trailing four quarters, the average positive beat being 15.6%.
Stocks to Consider
Some better-ranked stocks in the basic materials space are Sandstorm Gold Ltd SAND and Harmony Gold Mining Company Limited HMY, both carrying a Zacks Rank #2 currently. You can see the complete list of today’s Zacks #1 Rank stocks here.
Sandstorm Gold has an expected earnings growth rate of 33.3% for 2020. The company’s shares have surged 71.8% in the past year.
Harmony Gold has a projected earnings growth rate of 28.6% for fiscal 2020. Its shares have soared 87.7% in a year’s time.
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