International Paper Company IP looks promising at the moment, backed by favorable demand trends across all its segments, restructuring initiatives, investment in high-return capital projects, and mergers and acquisitions.
Recently, the company reported fourth quarter and full year 2018 results. Fourth-quarter 2018 adjusted earnings were $1.65 per share, improving 30% from the prior year. Net sales rose 4% to $5,951 million in the reported quarter. The company beat the Zacks Consensus Estimate on both counts.
Shares of this Zacks Rank #3 (Hold) stock have gained 3% in the past three months against the industry’s decline of 16%.
Below, we briefly discuss few other factors that make the stock worth holding on to.
Underpriced: Looking at the trailing 12 month Enterprise Value to EBITDA ratio, International Paper’s shares are underpriced at the current level. The company has a trailing EV/EBITDA ratio of 5.3, which is below the industry average of 8.9.
Positive Earnings Surprise History: International Paper has an impressive earnings surprise history. It outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering average positive earnings surprise of 5.85%.
Upbeat 2019 Guidance: The company guides adjusted EBITDA to lie between $4.3 billion and $4.4 billion in fiscal 2019 compared with $4.3 billion of adjusted EBITDA reported in fiscal 2018. In the North American Industrial Packaging business, box demand remains strong aided by e-commerce and produce. Further, the company’s focus to serve the rapidly-growing segments will be an important contributor to the strong performance. Its concerted efforts to align with the customers will also aid performance. International Paper is leading in e-commerce, fresh produce and protein.
In Europe, the benefits of the Madrid mill will accelerate through the year. In the Global Cellulose Fibers business, global pulp demand remains strong and demand in the fluff segment continues to grow at 4-5% annually. New product introductions in the fluff pulp segment and its optimization initiatives are likely to drive results. In the Printing Papers segment, improved global demand will bolster segment revenues.
Other Growth Drivers: International Paper is undergoing restructuring, under which it has offloaded businesses in China to focus more on its U.S. operations. The company has also completed the divestiture of its consumer packaging business in North America. Further, International Paper intends to invest significantly to improve its North American container-board mill system, enhance product quality, and reduce manufacturing and delivery costs.
International Paper aims to utilize its sound cash flow by investing in high-return capital projects, reducing total debt and returning greater proportion of cash to shareholders through increased dividend payouts and share repurchases. These projects are expected to have a collective internal rate of return of 20%.
International Paper has a long-term earnings growth rate of 9.5%.
Return on Equity (ROE): International Paper’s trailing 12-month ROE of 30.7% reinforces its growth potential. The company’s ROE is higher than the ROE of 18.8% for the industry, highlighting its efficiency in utilizing shareholders’ funds.
Stocks to Consider
Some better-ranked stocks in the same sector include Clearwater Paper Corporation CLW, DAQO New Energy Corp. DQ and Franco-Nevada Corporation FNV. These three stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Clearwater Paper has a long-term estimated growth of 5%. Its shares have gone up 31% over the past three months.
DAQO New Energy has a long-term estimated growth of 29%. Its shares have gone up 59% over the past three months.
Franco-Nevada Corporation has a long-term estimated growth of 4%. Its shares have gone up 149% over the past three months.
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